Momo Traders

by Brady Dahl

  I panicked because I had no idea if it was good or bad. I was reading Yahoo! message board posts that CAFE was going to open at $50. I thought I was going to owe my broker $30K or $40K. I had no clue.

  Five weeks later it opened for trading at around $4 or $5, so my $5K

  was now worth around $15K. This was right at the start of senior year, and I thought, well shit, this is what I’m going to do. I’m going to short! And that’s when I really started to study overbought patterns that shoot up and then come right back down. I quickly got on a huge hot streak and by the time I graduated in May I had turned that initial $5K into a million bucks.

  In under a year, wow…

  Yeah, it took about nine months. But when I think back on it, I had no rules, no money management, and no position sizing. Every stock I ever longed or shorted, I went all in. Whether my account was $30K, $100K, or even a million bucks, I was all in on margin.

  Dangerous…

  Yeah, but it was just eight straight months of winners. That huge hot streak helped me get to a million bucks. When I graduated I was cocky as hell. I figured by the time I started my MBA program in the fall, three or four months later, I should have at least three or four million dollars in my account. Needless to say, I blew up and lost $500K in the next two or three months. The market turned south, I didn’t see the same type of stocks, and I had no rules. I blew up and lost half a million bucks. I immediately wired $400K out of the trading account into the bank and started over from scratch with S100K.

  93 The Scanner

  And you’ve been profitable since then?

  Yeah, I had one negative year, but nine vears or so profitable trading.

  So you never had to get a job after college?

  No. I have worked on and off for my dad's business here in St. Louis my entire life, but I’ve never had another job.

  You mentioned reading books and researching, but did you do anything else to educate yourself along the way?

  No, 1 actually didn’t know of any chat rooms until maybe three years ago, and I didn’t join Twitter until two years ago. It probably took me longer to learn and longer to become profitable, but everything I learned was self-taught. It took tons of time, patience, and a drive to succeed. When you put your mind to something and do it almost every day for a couple years straight without making any money, there are times where you doubt yourself, but I just stuck with it. I continually saw the pattern of stocks that would shoot way up and then come right back down, but at the time I just didn’t know it was possible to go short. Once I figured that out, everything changed.

  Did you ever backtest your strategy, or was it as simple as just looking for an overextended chart?

  That was basically it. I never really backtested. It was just looking at charts and figuring out what pattern did what. I’ve just loved the market my whole life. My mind is always on the market. When I wake up. When I sleep. If I get up in the middle of the night to go to the bathroom, I think about a trade from that day. It became ingrained in me to remember which patterns did well and which did not.

  I’m sure your wife loves your preoccupation with the market…

  (laughs) Yeah, she wants to throw my phone out because I’m always checking quotes.

  94 The Scanner

  What’s your routine on an average trading day?

  I get up with my son, so it s usually an hour and a half before the market opens. I immediately turn on my computer to see what’s moving pre-market. What’s the news? How are futures trading? Are they up or down? What are the biggest gainers and losers so far? After 10 minutes I’ve got a feel for what’s going on out there. My biggest preparation actually comes the night before when I run through all my screeners, look through all my charts, and figure out what I’m going to nail the next day. I’m not a huge fundamental analysis guy who’s great at deciphering press releases in the morning. I do want to know what’s going on, what’s moving and why, but it’s not a huge part of my game.

  So you consider yourself a technical trader?

  Yeah, I would say I’m 70 percent technical analysis, if not more. I follow the chart and watch Level II. I think whether you’re a technical or fundamental trader, price action and volume are what matters. Take a stock like PLUG, for instance, when it ran to $11.50. The fundamentals sucked just the same when the stock was at $4, $6, $8, or $10, so you couldn’t short based on the fundamentals alone.

  You can still get run over…

  Yeah, so at the end of the day it’s price action that matters. It’s the only thing that ever matters, so that’s what I focus on. I would like to learn more fundamental analysis, but TA is where it’s at for me.

  Do you review trades at the end of the day?

  Rarely. The only thing I will do is check Gainskeeper or Prop Repots programs that tally all of your trades, to see what kind of trades are my winners and what kind of trades are my losers. I know I’m making all of my money shorting stocks like DGLY a $30, LAKE at $30, $PLUG

  at $11, and APT at $9 or $10. Extremely overbought situations.

  95 The Scanner

  Can you say anything more about the scans you’re running?

  I run my scans on Finviz.com, looking for a stock that has daily volume over 100K shares and price over $1. I look for the biggest daily, weekly, and monthly gainers. If I see something I like, I put that ticker into BigCharts, which is the charting service I like and am most familiar with. Basically I’m looking for overbought charts. I want something that looks extremely parabolic. 1 do also look for oversold opportunities to go long, but it’s so much easier for me to find an overbought situation that I think is going to fall than it is to find a falling knife that I think is going to bounce. Some knives keep falling dav after day after day, and it’s not where I make my money.

  What's your trading desk setup? What platforms and tools?

  Gateway desktop. Nothing special. Four 27” monitors, three arranged side-by-side and one double-stacked. I still trade with the Scottrade account I opened when I was 18 because I’m familiar with it and they’ve always had great borrows up until recently. Apparently quite a few traders have blown up lately so any stock with volatility is being restricted. I place most of my trades through Centerpoint Securities using Sterling Trader Pro with my Wedbush account and DAS Trader Pro with my ETC account. I also use Equityfeed to scan intraday for the biggest gainers on a 2-, 5-, and 10-minute timescale. Equityfeed is good for when the market is slow and nothing from my previous night’s watch list is performing. I can see what’s moving and if there’s anything going parabolic out there for a nice scalping opportunity.

  Which platform do you use for charting?

  I use DAS Trader for my intraday 1-min and 5-min charts and BigCharts.com at night for scans.

  What about chat rooms and Twitter?

  Investors Underground is the only chat room I use. I’ve tried a couple others, but the service wasn’t great. Chat is good because news is

  96 The Scanner

  usually posted in a timely manner and you’ve got a handful good traders posting their ideas. It’s also helpful because stocks get brought up that might have fallen off your radar. Twitter is good because I can filter out who I want to hear from and who I don’t. If one of the 35 or 40 traders I follow has a good idea, I’ll look into it.

  Do you have specific criteria a stock must hit before placing a trade, or do you just play them as you see them?

  I’m really just looking for something that’s overbought. When I run my scans, I want to have at least five candidates for trading the next day. But it all depends on how the market is behaving. I try not to short into strength. Although if something is going truly parabolic, straight up, I might try a short, but I usually like to wait for the trend to break before jumping in. Why fight the trend? If something’s going up, I’m not touching it. I prefer a breakdown on heavier volume when sellers are jumping in.

  How biased are you towards the short side?

  I’d say
90 percent of my trades are shorts.

  Are you using technical indicators like VWAP, etc?

  I have never used technical indicators. The only thing on my chart is volume and price. It wasn’t until as recently as two years ago I really started looking at Level II as well. But it’s not as efficient as charts.

  So a stock goes parabolic, are you slamming the bid to get short?

  I don’t mind taking liquidity and having ECN fees add up, but it all depends on the trade. I definitely try to get in on the offer, but since I prefer to wait for a downtrend first, preferably on some increased volume, it can be quite difficult to get in on the offer at that point.

  You’re almost forced to take liquidity to get in on a short like that.

  97 The Scanner

  Entering on a break of support or just the first sign of weakness?

  First sign of weakness. But when it does break support, I’m jumping in with both feet. I scale in and look for confirmation. Say I want a full position of 10K shares. I might take a starter position of 2K shares first. Then if the stock stays weak and it’s still downtrending, I add a couple thousand more here and there as it goes. I will often have to chase a trade on the downside, but I actually kind of prefer it that way rather than getting in bigger and adding to my losses as the stock goes up. I would rather add to my gains than try to guess the top. Guessing the top is a fool’s game unless you see something going truly parabolic on the 1-minute chart. Then you might take a stab at it.

  Are you always starting with about a fifth of a position?

  It’s probably around a fourth, but there’s really no set amount because it depends on the setup. It doesn’t happen too often, but if I see something like DGLY at $30 and it tanks two bucks very quickly on huge volume, I might get in a half or two-thirds position right then and there. When these huge parabolic charts breakdown and finally lose momentum, the end can happen so quickly there’s hardly enough time to react. You just have to get in and get out.

  What’s the process on a more typical trade?

  Yeah, the majority of trades are not those huge setups. The typical trade is what I would call mediocre. I cut my position size way down. I won’t take a half million dollar position, and maybe it’s only 3K or 4K

  shares. And I will scale in a lot smaller. I never jump into two-thirds of a position immediately on a mediocre setup. When the huge reward isn’t there I don’t want to take that huge risk.

  Where would you stop out? Do you have a hard stop?

  No, I never have. I never have hard rules. It really depends on the price action. If I start an early short on a stock that’s going parabolic, I probably won’t even take a fourth of a position. I’ll take something

  98 The Scanner

  really small like a tenth of a position. Then I can really give it time to add in again, because I don’t want to have any conviction on a trade until I see downside. I never want to have a full position on something that’s still uptrending. I want to see it breakdown first. So if it does the opposite and breaks out to the upside, I get out immediately. I take the small loss and move on. I don’t want to take big losses. In fact I would rather get in and out of a stock five times before making money than get in once and stay in while it goes against me and the losses mount up. I tried the add, add, add to a loser method when I was younger and it never worked for me. So I don’t mind commissions and fees adding up if I can just keep my losses to a minimum.

  Some guys will add to the moon just so they don’t take the loss…

  Yeah, I don’t have that conviction. I don’t want those huge losses. I would rather make less and risk less every day. I never want to put so much on the line where I could blow up and lose $500K. That would be demoralizing. You would want to quit. Trading is a mental game.

  Once it gets in your head, you’re screwed.

  What’s your most reliable trade setup?

  My most reliable setup is shorting a stock that’s up huge three or four days in a row, something like APT which went from $4 to $10 in three days. At that point you don’t even care what the news is really. In fact most of the time the news is bogus with these small caps anyway, but I’m very confident that a stock that has run extremely hard for three or four days is going to offer a nice pullback.

  Is that also your most profitable setup?

  Yeah, I would say so. Although they were probably more profitable when I used to hold them a lot longer. When I started making money going short my senior year in college, I would hold these big chart shorts for weeks and just let them ride themselves out before covering.

  But with my current brokers you’re really only allowed T+3, or basically four days, so I don’t hold as long as I used to.

  99 The Scanner

  How many trades do you typically realize intraday?

  I probably trade five to seven tickers, but with scaling in and out there might be a hundred trades. If I have to get in and out of a trade several times before nailing it, and then adding on the way down, I might place 30 or 40 trades on one ticker.

  How many positions are you comfortable holding at once?

  I’d say three to four trades max. If there’s a great setup, something up huge where I think I can make $20K or $30K on it, I’ll usually zone everything else out. I’ll forget the stocks where I was going to make $500 or $1K in order to focus on the main one. But if there’s no huge trade out there and everything’s a scalp, I’ll take three or four trades.

  I’ve done more before, but I’m placing trades with multiple brokers, and before you know it you’re down on this one, up on that one, and you’ve missed taking profits on another one. It’s just too much.

  How big are your positions generally?

  I have four brokers for day trading with about $500K in each account, so that gives me about $2 million in buying power. I’d say my positions are anywhere from 20 percent to 40 percent of the account.

  If I have more conviction, I’ll go in more than that.

  How often are you flat at night?

  My trading has really evolved over the last several years to where I rarely take positions overnight. I like to take profits intraday. There’s nothing worse than waking up $5K or $10K in the red. Sure, you could be up a lot of money too, but starting the day down $10K just isn’t worth it. It puts you in a bad mood and messes with your mind.

  Not worth the aggravation…

  Yeah, exactly. And I think taking overnight positions is how a lot of traders end up blowing up, too. Start off red and then make it worse.

  100 The Scanner

  However there are certain positions I don’t mind taking overnight stocks like LAKE at S30, something truly overbought and parabolic But then again, with the Ebola press releases coming out what seemed like even’ hour, that stock could have gapped up, so it’s all risky. Bur I sleep better when I’m in cash overnight.

  Do you set a target before you place a trade?

  Not a firm target. When I place a trade I’m looking at short term charts but also long term charts to see the bigger picture. I take a look at the 3-month chart or 6-month chart to see how far the stock could potentially fall. I’ll have that number in mind, but I usually don’t have the patience to hold for that entire move. Just like I’m scaling into a trade, I’m scaling out. If it drops 50 cents, I’ll cover a quarter of the position. If the price falls another 25 or 50 cents, I’ll cover another quarter. Scaling out all the way down.

  Do you keep the last portion of the short for a homerun?

  I usually don’t. I never just hold something to see where it can go the rest of the day or week. I usually take profits and then possibly start looking to re-enter the short if the stock bounces.

  Are you taking profits on any flush with volume or at chart-determined areas like previous support?

  It’s usually on a flush.

  How long do you typically hold a stock? Is it hours or minutes?

  On average, probably half an hour to an hour. But the best money
is usually holding several hours or all day, at least on bigger setups.

  What do you do during the trade? Surfing the web or analyzing?

  I’m studying the chart and Level II. I’m also probably watching the charts of competitors, too. If I’m trading American Airlines, I want to

  101 The Scanner

  have the charts of Delta Airlines, United Airlines, and maybe Southwest up, too. XXliat are those charts doing in comparison to mine? If the other three airlines are tanking, I might feel a bit better about my short, but if they start to bounce, I might think twice. But yeah, I keep a pretty steady eye on the trade I’m in.

  Are you looking at your P&L?

  Oh yeah. Some traders claim it’s not about numbers, it’s not about money, but it is to me. What else is there? It all comes down to what you’re making. I don’t necessarily take profits or place trades based on P&L, but I want to know how much I’m up or down.

  Just don’t let it influence your trade decisions…

  Yeah, don’t let it influence you. But I want to know what I’m up or down because if I go into a trade thinking I’m going to make $2K and I’m already down $1K, my risk/reward ratio is way out of whack. I should be getting out. So yeah, I keep an eye on it.

  Any advice for other traders on how to let winners run?

  Patience. I’ve gotten lazy about it, but what I started to do was print out all the biggest winners from the previous year on BigCharts.com.

  I’d print out the chart of anything that went from something like $2 to $20. Then I’d print out another chart of the same stock as it went from $20 back down to $4 or $5 or whatever. I kept copies of these to remind myself that these patterns would repeat themselves over and over again. They go way up, then come way down.

  It gave you the conviction to hold…

  Exactly. You gain confidence. Looking at those patterns over and over gives you confidence to take trades like LAKE and DGLY.

  102 The Scanner

  You know they’re going to come back down but timing is key…

  Yeah. In hindsight of course shorting LAKE at $30 was the obvious play, but at the time it seemed like even* day another Ebola headline would hit and the stock could have gapped another $5 or $10. So it’s hard to have conviction to hold no matter what. But Eve got 50 or so charts in my desk I can look at, all with the same pattern, all with the same crash in the end. Once the fear and emotion subside, the momentum disappears and the price comes back down.