by Brady Dahl
Talk a little about risk management. How do you handle it?
Improving my risk management is probably the most important thing I’ve done in the last couple years, which has led to me having the best two years I’ve ever had. I went back and reviewed my trades from the previous five or six years and looked at the setups that produced $30K
to S50K wins and the setups that produced $15K to $25K losses. I could tell the difference between them. So if it’s not one of the good setups, either A) don’t trade it, or B) cut your position size way down.
So part of risk management is knowing when to size in or not. Review your trades and figure out where you’re making money and where you’re losing money. If a particular setup doesn’t make you money, why the hell are you even trading it, let alone with size? The other side of risk management is simply cutting losses quickly. I don’t like doing it, but like I said, I don’t have a problem taking several smaller $1K
losses before finally getting it right. Keep the losses small.
What was the difference you discovered between your big wins and your big losses?
The charts just weren’t as good for the losers. The setups weren’t as good going in.
You forced those trades rather than let them come to you?
Yeah, you force it when you’re bored. Let's face it, if you sit in front of your computer for eight hours a day trading, you feel like you can’t
103 The Scanner
end the day without making at least a little bit of profit. If you sit all day without placing a single trade, then what the hell are you doing? So you end up forcing trades. My most profitable trading occurs when the setups just appear. They’re so good you just know you’re going to make money. You don’t need to force those. But if I enter a trade with huge size on a mediocre setup, then yeah, I deserve to lose money.
Do you aim for a set amount of profit each day?
No set profit. It all depends on how good the setups are. Quite often it takes several days to nail a good trade. You think you’re going to make money today, but it doesn’t crack. The next day you try again, but it still doesn’t crack. Maybe the third day it does finally crack. So I never go into a day with a profit target in mind. I’m not a trader who makes $2K to $3K a day consistendy. I make money in chunks, $10K here, $15K there, and then maybe nothing for a week. In the meantime I’ve been working on improving my scalping, $1K here, $500 there.
Do you have a max loss amount where you’ll tap out for the day?
I like to tell myself it’s $10K to $15K, but no, not really. Because it’s hard to walk away if you’re down $10K. You tell yourself that it’s going to crack next time, I guarantee it, so you stay. But I do think it’s important for most traders to have a maximum loss point where you just walk away, because I’ve seen it snowball into bigger and bigger losses. It gets in your head and that’s no way to trade. You can’t trade unless you’re thinking clearly, and when you’re losing money quickly, you’re definitely not thinking clearly. It’s best to just walk away. At the very least, take a break, go outside for 20 minutes and sit in silence, just get away from your computer. Once your head is clear you can decide whether or not to continue trading.
What’s your biggest win?
I think it was my senior year in college. There was a company called Empire Resources, and I made around $400K on it.
104 The Scanner
Was that a parabolic chart?
A short, yeah. Parabolic. The stock went from around $10 all the way to $60 within two months. Then it went from $60 to $40 in two days, which is where I made the first huge chunk of profit, maybe $200K.
Then the stock bounced to around $47, where I re-shorted it and rode it back down to $30 in like three more days. It must have been a pump and dump, but I really didn’t even know what a pump and dump was back then. It just fell so quickly.
That was a big year for you…
It was sweet. I was a senior partying in college and had the money to go with it. I was happy about the money, I’m not going to lie, but even more so, after slaving away studying the market for hours literally every night, I had finally figured it out. I finally realized I could do this for a living. I didn’t need to go get an accounting job or study for my CPA test, I was going to trade! That $400K trade was the trade that put me over a million in profits for the year.
What’s your biggest loss?
I honestly don’t remember one giant loss. I’ve had several losses between $20K to $50K, but I’ve never had a $200K or $300K loss. I did have one red year, though.
What happened?
After making a million senior year, I gave back nearly half of it during the rest of the year being stupid. So I wired everything out except $100K and started over from scratch. Back to basics. The next two years I made nearly $500K each year. I was 25 years old with profits of about $1.6 or $1.7 million. After taxes I had about a million bucks in the bank, so naturally I was cocky as hell and thought I could do no wrong. It was time to step up my game. $400K to $500K per year just wasn’t going to cut it anymore. It was time to put $500K into my account and increase position sizes. I started trading large caps and
105 The Scanner
soon learned of triple leveraged ETFs. This was around the time of the financial crisis, 2007 or 2008, and FAS and FAZ, two triple leveraged financial ETFs, were making unreal daily price swings. I started trading them with huge size and got my ass absolutely kicked. Day after day after day I would lose $5K or $10K. At the end of the year I had lost at least $300K.
Why did you stick with the ETFs when it was going so poorly?
I don’t even know. I have no idea why I stuck with it. I thought I was smart enough to beat it. I had made good money trading for three years in a row and thought, after a little bit of a learning curve, I’d be nailing these ETFs by the end of the year. I told myself I was smarter than the market and I took a beating for it. Ever since then I’ve banned trading ETFs. I won’t even look at them.
What did you learn, besides avoid ETFs?
Stick with what you know and what you’re good at. Be happy with it.
There seems to be this thought amongst traders that you always need to learn something different. Even though a guy makes J200K per year trading OTC stocks, he feels he needs to learn Nasdaq stocks or something else. Now obviously there’s nothing wrong with learning, everybody should be continually learning, but there’s also nothing wrong with sticking to what you know, sticking to what you’re good at.
You don’t want to jump into something new with both feet.
If it’s not broken, don’t fix it…
Exactly. I was 25 years old, making half a million bucks a year, yet I told myself it wasn’t good enough. But in a way, I’m glad I had that year. I think everybody’s going to have a cycle of stupidity, if you want to call it that, where you just do dumb shit. I’m happy it happened back then rather than today. I still try to learn new stuff, but what’s more effective is tweaking what I already know to make it even better.
106 The Scanner
What did you do after that year to return to profitability?
I went right back to trading the way I had before. And it took awhile to readjust. It took a couple months to get back to being profitable.
Back to basics is the way you handle big losses or losing streaks?
The best way to handle a big loss is to keep it in the back of your mind, but act like it didn’t happen. If you’re still dwelling on yesterday’s loss, you’re going to get killed today. You have to get it out of your head because trading is a mental game. You have to be in the right state of mind to be successful. Handling losing streaks, on the other hand, is a bit different. I just size way down. If the losing streak is really bad—I don’t like doing it—but instead of keeping $500K in each account, I’ll wire down to maybe half. I don’t like it because if I see a killer trade setting up, I’ll have to go right back to the bank and wire money back in, but sometimes it’s necessary. I t
hink when you’re cold, you have to play with less money, less position size, and less risk.
Focus on money management. Day traders don’t fail because they don’t make money. They fail because they lose all their money. So you have to limit losses. I rarely go to bed angry that I didn’t make more money, but I guarantee I will go to bed angry if I lost money when I shouldn’t have.
Have you ever thought about quitting trading?
Yeah. The year of triple leveraged ETFs. (laughs) But even now I’ll go through cold streaks of one or two months where I make very little money. It s not easy. It’s really not. I know some people think one month is probably no big deal, but if you sit at your computer eight hours a day, five days a week, for four weeks and you’re still sitting at zero, or worse, down $15K, it weighs on your mind. Fortunately after 10 years of trading, I know the cold streak will snap and something will come along to make decent money, but it’s not easy.
107 The Scanner
What’s your biggest disappointment when it comes to trading?
I’m 50/50 on it, but back when I started trading at 18, I knew of no chat rooms, no Twitter, no social media for trading. Nor did I have any service or mentor to help me. I think it would have been nice to have a chat room where I could have watched good traders make trades. See when they enter, when they exit, and basically find out what they’re looking for. I think that could have helped tremendously. On the other hand, I think the experience I gained doing everything myself was invaluable. I had to pour through so much more information compared to the average trader today. Everything I learned was on my own.
The shortcut might have changed the type of trader you’ve become. Today there are so many voices to influence you…
Yeah, I’m not influenced whatsoever because I already have my own experience, my own methods.
What would you call your defining moment in trading?
Learning how to go short. And I feel kind of dumb that it literally took me two years to realize that I could even go short. But ever since then I probably go short 90 percent of the time.
Do you remember how you learned to go short?
I have no idea. Reading an article somewhere, I’m sure. But when you’re researching the market, who is talking about going short? You can’t read on CNBC.com about short selling. Maybe one article here or there, but finding material about short selling is difficult.
And it’s usually a negative piece…
Yeah. Short selling is evil and un-American.
108 The Scanner
What’s your proudest moment in trading?
Probably just what I’ve accomplished in the last two years. I never thought I would hit a million bucks.
A million dollars in profit per year?
Yeah, a million in profits in 2013 and again in 2014. One reason is because the market has been good, no doubt about it. The market has been on fire, producing a lot of parabolic charts. If you have the right market, you can trade it. But another reason for my success is cutting down my losses. Like we discussed, I figured out what setups weren’t working as well as others by looking at my past trades. Instead of focusing on making more, I’m focused on losing less. So I really don’t feel like I’ve traded my winners any better the last two years, and yet I’ve doubled my profits by minimizing losses.
Do you think you’re an addict?
Without a doubt. If I won the lottery and was set for life, I don’t think a day would go by without still looking at the market. Maybe I wouldn’t be up in time to see the open as much as now. (laughs) But yeah, I’m definitely addicted. I think that’s what makes us successful.
My love for the market and it being constantly on my mind is what drove me to study, learn, and never give up on trading.
Do you still worry about blowing up or going broke?
I don’t worry about going broke, but I definitely still worry about cold streaks. I understand they will end, and I understand the market will get better, but during those periods of not making money, I definitely worry. I don’t treat my savings in the bank as spending money. I like to make money trading month in and month out. I expect to take enough money out of the market each month to at least pay our bills, pay my taxes, maximize our 401Ks, and still have some left over to keep stockpiling our savings. So if I can’t do that at the end of the month, I do get worried.
109 The Scanner
Have you diversified in other investment vehicles?
It’s a topic I’ve discussed with a lot of other traders recently. What do you do with your money outside of the market? I wish interest rates were higher so I could park every penny into a 5 percent or 6 percent CD backed by the government. I’d have no problem doing that because everything else requires taking on more risk. I’ve had rental properties and considered getting bigger into real estate. I’ve been making roughly 10 percent with Lending Club for a couple years. But pd say the majority of my account is just sitting in a bank making me nothing. I hate putting money into an area in which I have no expertise, so I’m still searching for the right diversification.
You mentioned 401Ks… Do you trade under a business name?
Yeah, my wife is actually 50 percent owner of the business. Secretary.
So we each get to max out our 401Ks every year. We can make the limit of $17.5K, but I think with profit sharing we can each put in something like $50K. Tax-wise I’m not sure, but I think you get 50
cents on the dollar for everything over $17.5K. We also have other taxable accounts with mutual funds and longer-term stocks like Bank of America and Citigroup. No debt either. Everything is paid off.
Do you think trading is innate or can it be learned?
I think trading can be learned, no doubt. But I think to be a great trader you have to have the right mentality. You can’t worry about risk to the point it becomes a detriment. When you see a great setup, you can’t hesitate to put a million bucks on the line if you have great conviction. You definitely need money management, but you can’t be too worried to even take a risk. Some traders are good, but they don’t make much money because they’re only willing to trade 500 shares.
What other traits are necessary to become a successful trader?
In my case, I’m addicted to the market and have been from a young age. And I love the market. I had no problem taking all the time in the
110 The Scanner
world to study. I was in college, didn’t have a wife or kids, and I didn’t need trading to provide an income. I would just study constantly. I would study until I fell asleep. Lazy people who want instant gratification won’t be successful traders. I don't think trading is any different from other professions in the sense that you have to put in the effort and hours to become a pro. People just starting out come to me for shortcuts, but honestly you just have to study.
There’s no easy way...
You have to put in the time. There’s no other way to do it besides putting in the time and effort.
What are you doing now to become a better trader?
I’m happy with what I’ve been doing cutting my losses the last couple years. But I would also like to improve my fundamental analysis. I need to dig deeper, research more, and figure out what’s behind the move.
ViTiy did PLUG go from $5 to $12? Is it being pumped? Who s behind it? What are the press releases? What are they really saying?
Knowing that information brings conviction to your trade. Not that I ever want to fight the trend and hold through large drawdowns—-I don’t think I’ll ever do that—but knowing that information can still improve my trading. If you can read a PR and justify whether or not it’s worth a 50 percent increase in stock price, you can make an informed trade. So I’d like to get better at that.
What’s something you do that you think other traders might not?
I try to scan almost all day if I’m at my computer. I think a lot of traders sort of slack during the day if there’s not much to trade, whereas I am constantly scanning. Is there some
thing out there for me to scalp for $500, something to help me end green on the day? I admit to surfing the web, too, but I definitely don’t go 10 minutes without running a huge scan to see what’s moving.
111 The Scanner
What do you think other traders do better than you?
Fundamental analysis?
Yeah, without a doubt. There are traders who can read a press release in a second and know what’s really going on. I’d like to get better at that. And recently, as I’ve focused on cutting losses, I’ve probably sized down too much on better setups because I was nervous.
You’ve missed out on maximizing opportunities?
Yeah, I’ve lacked the conviction to hold lately. As a stock fades I’ve been taking profits on my short as soon as I see a little bit of an uptick, afraid that it’s about to bounce. If I had more conviction I would know it’s going down and just hold the position for larger profits.
What’s the most important thing to remember while trading?
I think patience, definitely. Wait for the trade to set up instead of chasing it. And when I say chase, I’m not talking about shorting a stock on weakness. I’m talking about forcing a trade that’s not quite there yet. Rarely do I have a trade work out when entering an imperfect setup. You have to wait for the perfect ones.
What do you wish someone had told you when you first started?
Study. It takes time. You have to do it yourself. Don’t be afraid to put in the hours. Don’t expect not to put in the hours. Don’t expect it to be given to you. Don’t expect to learn the secret method from someone else. You have to work out your own method because even if some great trader taught you his, you might not be comfortable with the drawdowns he endures, or the amount of time his strategy takes.
You have to figure it out yourself. And it takes time, so be patient.
