Momo Traders

by Brady Dahl

I use the 1-min chart intraday and the daily chart. That’s it. And I don’t typically draw lines on charts, although I do look for where support is holding or what price points the stock is “magneting”

  around, or hanging around.

  Do you use any technical indicators?

  No, I don’t use SMAs, EMAs, Bollinger bands, or anything like that.

  Just volume and the candlesticks. I feel like all the others are hindsight indicators. When you actually look at them in real time, they look absolutely nothing like what you see after the fact. I know those indicators give some people the confidence to make a trade, and if that’s what you need, then go for it, but personally I’d rather rely on price action, Level II, and Time & Sales.

  Can you explain how you use Level II and Time & Sales?

  Well, there’s not really an objective answer. Best I can do is give you an example. Let’s say you’re watching a stock that is about to squeeze, and someone posts a very large bid on Level II. Then a bunch of volume comes into the offer but the price doesn’t budge. It’s just a

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  huge volume bar and then that large bid disappears. To me that tells me someone’s trying to prop up the stock artificially. They want to scare shorts into covering, maybe convince longs to buy, and then potentially pull the bid later on and sell it off. They build a short position and then pull support. So Level II and Time & Sales don’t really provide me with a certain answer, but I like to use them as sort of a secondary guide. It’s subjective.

  Do you care whether or not you provide liquidity when trading?

  I do whatever I need to do in order to enter the trade. If I m prepared for a trade and I’m looking to long something on dips, for instance, I’m typically adding liquidity, waiting on the bid and scaling in. On the other hand, if I see a stock that looks like it’s about to break out, I’m not going to worry about waiting on the bid, I m just going to take out the offer. I’d say for the most part I add liquidity, though.

  Using hidden orders…

  Yeah, most of the time, because you don’t want to show your hand.

  That’s an edge you can have, so why give it away?

  You mentioned scaling entries... At what increments?

  Yeah, I scale in all the time. And I usually start off with much smaller than you would expect, before slowly adding in from there. I typically start with a big picture idea, so I know where I think the stock is headed and I want to scale in based off X price. If it’s not doing what I expect, I won’t add. If it’s doing exactly what I expect, I will continue to add to that winner. I only like to add to a winning position.

  But you also average into trades that are going against you from time to time…

  When it’s part of the plan, yes. The reality is we trade stocks with high, volatile ranges, so I’m not going to get the perfect entry every single time. I can’t nail the exact top or exact bottom every time, so the idea

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  is to average into a position around those levels. So if my thought process is that a particular stock is going to move towards a whole number, I’ll take a starter position first, maybe a third or half size.

  Then I won’t put on full size until the trade is either going my direction or making an extended parabolic move, in which case I'll keep a very short leash. Typically, though, I only like to add to full size if I already have house’s money.

  Can you run through an example of scaling into a short?

  GENE today was holding in the $9.10 to $9.20 range before it started to break out towards that $10 whole number mark late in the afternoon. I don’t know if it’s going to go to $10 or $10.20 or $10.50, so if I want to trade 5K or 10K shares full size, I can’t do that in one entry. If I’m in full size and it goes another 50 cents, I’m going to be in a pretty bad situation. So I like to anticipate the short into that parabolic move. If it starts to go $9.40, $9.50, $9.70. . and then goes from red to green on the day and rips toward that $10 mark on increased speed, I’m going to start into that $10 push with a partial position every day of the week because there’s a good chance it can’t sustain and will have some kind of a pullback.

  And how big is that starter?

  Somewhere between 1K or 2K shares so I can be comfortable with a 50 cent or even dollar move against me. I took the starter so I can potentially start with a good average, but I won't add more until it starts putting in a lower high, lower high, lower high, where it’s peaking out. In the case of GENE today it did put in lower highs and peaked out at about $9.80 a few times before starting to fade off lower.

  That’s when I want to go ahead and add more shares, building my risk off of either $9.80 or $10, depending on size of the trade.

  Adding to a winner…

  Exactly.

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  What if it holds at $10 where you started and starts going higher?

  Are you cutting it off or adding?

  Well, part of my goals for this year are to cut losses on the front side of a big move, but it’s a learning process. Put it this way, as long as you have a plan and you’re not adding outside of that plan, you’ll be fine. If you don’t have a plan, you shouldn’t be trading it. If you were anticipating the push to $10 and then a quick pullback but now it’s slowly grinding back up and looks like it’s ready to break out again, you should size back down or get out completely. The worst thing you can do—and I’ve been getting progressively better at this—is wait patiently while something does the unexpected and goes against you.

  Have a plan and suck to it.

  How do you determine your stops on an average trade?

  First of all I don’t use hard stops. I use mental stops, because I find in some of the thin stocks we trade it can be just one order that stops you out, especially during the afternoon lull where one big market order can push the price. But if you have a hard time following your plan and taking your losses, you should place hard stops. On average I’m usually scaling into trades against whole or half dollar marks. So if I’m looking to risk $0.10 on full size, I’ll risk $0.40 on a quarter size starter position. Then I continually lower the amount I’m willing to risk as I add to the position. So once I make it half size, I’ll probably move my risk to $0.20, then $0.10 for full size. The ability to scale into a trade is what gives you the leeway to adjust your stops.

  Do you set targets before you enter trades?

  At the very least I want every trade idea to have a 3:1 reward-to-risk ratio. So if I think a stock is going to move $0.30, I’m looking to risk $0.10. I don’t necessarily have price targets, but I have an idea of what trigger points are really going to cause the stock to wash out, and that’s probably where I’d like to cover.

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  And you’re scaling out like you scaled in?

  If I’m anticipating a wash out and it happens quickly, I’ll go ahead and lock it in right away. Because there’s no other job where you’re going to just walk in and make a grand or two in minutes.

  Are you locking in all of it?

  Anywhere from a quarter to a third, without question. I have the worst possible patience, and I like to be right, so when a trade immediately goes my way, I’m taking some profits. But it’s that profit cushion that gives me the patience to let the rest of the shares ride and play out.

  Do you move your stop down on the remaining shares?

  I’ll take the rest off when one of two things happens—either 1) the stock starts grinding back towards prior resistance and perks above it, or 2) if the stock changes trend and starts to put in higher lows.

  How long does a typical trade take?

  Probably 70 percent of my trades take anywhere from seconds to minutes, which probably stems back to when I first learned to trade in college. I was always trading between classes, so I only cared about the move, the big move, and not what it was going to do all day long. But now I am working on bigger picture type trades where I might hold a stock all day. There’s bigge
r money to be made there.

  What’s your favorite trade setup?

  I have two favorites that I’m most successful with. One is the very overextended chart, something that has been climbing up steadily for days or even weeks with no big correction yet. There hasn’t been any reason for people to take profits because every time they look at it, it s up even more. What I’m watching for is the day it speeds up relative to how it was climbing previously. So if it was going up five or 10 cents every day and suddenly it gaps up 20 or 30 cents higher one day, then

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  ramps another 30 cents at open, that’s when I’m interested in it. That might be the day where it falls back off highs and longs consider taking profits. That first profit-taking candle is sometimes awesome. It can be an adrenaline rush because not only did you anticipate it, not only did you load up on the short, but the profits can happen in literally 10 seconds.

  And your other favorite?

  A nicely trending stock that continually consolidates and holds gains each day. I want to start looking for a weak open, where the stock starts off red but begins consolidating and moving back up towards green on the day. Once I see that I start buying dips with my risk or stop at the low of the day. We’re anticipating the red-to green move because once it hits green, it usually gives a nice rip and trade.

  One short, one long... What is your tendency?

  I'm definitely more comfortable going short, hands down. One hundred percent. The last couple of years the long has been so easy, everything going straight up, and I’ve just been caught waiting and waiting for the short. I don’t trust the stock market. I have a much easier time finding the top. As you know, it’s a staircase on the way up and an elevator on the way down. Profits are quicker on the short side.

  Although I am continually opening my horizons and trying to get more balanced lately.

  How many positions are you comfortable with at once?

  My best days are when I trade three or four tickers with only two or three trades on at a time. I can manage upwards of five or six, but the only time I usually have that many is when I’m in partial positions, letting things ride. Trading less is more, really. If you focus on the big setups, the high probability, big reward type trades, your profits are going to skyrocket. If you’re trying to nail 10 different trades because you re afraid to miss one, you’re going to minimize profits across all of them. So you’re basically doing more work for less return.

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  How big are your positions as a percentage of your account?

  To be honest I don't look at what percentage my trades are. What I look for is really what risk I'm willing to take, not the entire value of money that I m putting into the market. For example, I’ll look to risk $300 on a trade where my risk is 10 cents on 3K shares. Or I might risk $1K on that trade if 1 think I need a 30 cent risk on 3K shares. It all depends on the number of shares I want and how big of a range I think that stock will have. In fact, I really don’t focus on equity at all. I don’t even know what s in my account most of the time. I focus on trading and usually don’t pull up the account info unless I’ve been on a tear for a month or two and have finally had a bad day. Then I might check and potentially wire out.

  So your risk varies on any given trade…

  Depending on how I’m trading and how the day is going I might risk more or less, but I have a plan for every single trade before I enter. If the trade works, great, but if it doesn’t, I revert to my plan to see where I want to stop out. Of course there are times where you might let it blow through your stop, and then you need a number that will keep you in the game.

  You’re talking about your “oh shit” handle number…

  Yeah. I think the reason 90 percent of traders fail is because they don’t have that number. They end up blowing through accounts like I did when I started. That’s why I developed the “oh shit” handle number, like when you’re in the car and you grab for the “oh shit handle. You weren’t expecting this to happen, you weren’t expecting the trade to go this horribly, but here it is, and you need to be forced out of the trade, no matter what. My number is $10K. If I get down $10K on a trade, I’m out. Your number can be whatever works for you, but it should be a number that, yes, it’s a dent, it hurts, but it won’t stop you from coming back to work the next day. It’s recoverable. Pick a number and stick with it. I went back through my trades over the last three or four

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  years and realized if I had stopped a few of my major losses at $10K, I would have saved myself about a quarter million dollars each year.

  Do you have a profit target each day?

  No, my motto is trade well and profits follow. Take what the market gives you. If you’re too focused on a daily quota, what happens if you don’t hit it? Do you have to double it up the next day? Do you start forcing trades to try to get there? I don’t think that works. In fact I’ve noticed traders start to excel when they no longer worry about their rent money or their car payment. Once they no longer associate today’s trades with bills they owe, they start to trade better. You really need a clear mind in order to trade well.

  How many accounts do you trade?

  Six or seven, but three main trading accounts. First is Centerpoint Securities clearing through Wedbush, second is Centerpoint clearing through ETC, and third is E*Trade, which I use for block trades and things like that. The other accounts are for longer-term swing trades or if I get a random borrow on a stock that no other broker has, so they get some use.

  How much do you keep in accounts to trade the way you do?

  Up until recently I would always keep about $70K to $100K in each of the three accounts. Once I had built an account up to $120K to $140K

  it seems like I’d inevitably have some type of drawdown, whether it was a stubborn trade or just a dumb trade. It always reminded me I probably wouldn’t have done that had I not had all that money in my account. So then I’d wire out back down to $70K. But recently, Gregg Sciabica, another trader in this book whom I admire greatly, questioned why I felt like I always had to wire out. It didn’t make sense to him with respect to growing as a trader, and it made me think twice. That thought, in combination with the fact that I had recently achieved a level of savings outside the market that made me feel comfortable taking on more risk, is why I no longer cap my accounts.

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  In fact, I’m focused on growing them. My main account is over $200K

  now and the other two are each a bit over S100K. My current goals are to get more familiar with trading bigger size, disconnect from the monetary aspect of the capital, keep my emotions in check during price swings, and grow from there.

  How often are you flat in your accounts at night?

  I’m flat overnight about 95 percent of the time, but again, I’m trying to learn new things. If you re only trading intraday, there are times when you’re prepared to short something in the morning only to find it gapping down 20 cents pre market and then washing out another 30

  cents at open. Now you ve missed 50 cents of downside unless you held the short overnight. So I’d like to get better at that.

  What are you doing during a trade, analyzing every tick?

  I’m usually multi-tasking like crazy. I’m answering messages in chat, reading emails, Twitter, pretty much anything besides talking. My wife knows I can’t talk and trade at the same time, (laughs) But I like to multi-task, and I think it helps because you shouldn’t have to watch every single tick. If you do, you’re probably in too big of size. Plus it leads to making impulsive decisions for no reason. Bottom line, you want to make trading as least stressful as possible, and if you’re going to make a career out of this, you need to think big picture. Go in with a plan and then execute that plan. Let the trade work for you.

  Do you look at your P&L during trading?

  Yeah, I do. It’s important to me because I really respect a $2K or $3K

  gain. I know
how much money that is. Sure, I might be aiming for much more, but if the trade instantly goes in my favor that much, I’m going to go ahead and take some off. At the end of the day, that’s what we’re here to do—take profits. But if you’re a person who lets P&L impact your every move, then absolutely don't watch it. But for me, it’s important. I watch it.

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  Do you think taking profits so quickly minimizes your gains?

  No, because I don’t take it all. And by taking some off, it allows me to be more patient with the rest than I would be with full size. Now I can let that winner run. If I’m up $1K and take $300 off, I have cushion to let the trade work for me and I’m not as emotional on the price swings. Instead of getting scared out of the trade as it bounces around, sizing down allows me to make more while actually using less risk.

  How much do you pay attention to the overall market?

  I watch it every single day. Some days I may refer to it more than others, but if the market is down 200 to 300 points, I'm not going to be looking for breakouts. The sentiment is not in your favor. In that case people are looking to sell on pops, not chase breakouts. Vice versa if the market is at huge highs. I'm not looking to add, add, add into a short. I'm more likely looking for dip buys. Basically you can use it to get a sense for how people are feeling that day.

  How do you use social media when it comes to trading?

  Well, no trader should ever influence you. If someone posts a trade, pull up the stock chart and see if you see what they see. If it fits within your strategy, go ahead and take the trade, but don’t just blindly follow. It’s the same as looking at someone’s posted P&L at the end of the day. People get caught up in comparing themselves, especially if the other trader’s P&L is much bigger than theirs, but you have to let yourself be inspired, not influenced.

  What’s your biggest win?

  It was a $130K win on one of the big promo stocks, CVDT, back when you could still hold an OTC stock for days and wait for the promotional mailers to hit. I probably held that one for three to five weeks. I’ve had many J20K to $30K wins, but with my habit of taking profits, CVDT was the single biggest. I’m getting better now at separating myself from the capital, forgetting that I’m up five or 10