Brain Lee: Chat With Traders Interview - Notes
A Review of Brian Lee's Interview on Chat With Traders
These are summarized notes from Brain Lee’s interview on Chat with Trader. Below I have categorized my notes into a few main topics. Hope you enjoy it!
Timeline of His Trading Career
1st Year Trading:
He started paper trading originally but soon realized that real-world trading is much different! He needed to relearn the nuances of trading with real capital.
For example, liquidity is a major factor he had to consider. By trading illiquid stocks with large capital, there is a risk of not being able to exit the trade at an optimal price. He also realized he needed to get more familiar with the tools and platforms he was using.
He got consistent when he started to short pennying stocks. The two factors that allowed him to change from a losing to a winning trader were his better understanding of Risk to Reward (R:R) and his compounding techniques.
He became systematic in his entries and exits - based on criteria he would use
Started out with $30K
He had to refund a couple of times to stay above PTD
2nd Year of Trading
Blew up his account
3rd Year of Trading
In Year 3; he understood and implemented risk management to protect against blowups most notably a metric he called the “Max loss on the day”
Max loss on the day, is as simple as it sounds. You limit your losses for the day either by setting a dollar value or a fixed percentage of your account. (Ie. if you lose 1% of your account in a single day, you stop trading for that day)
Day Trading Strategy
Creation of Setup:
He focused on a niche (ie. small caps) and took notes on what criteria were repeating. He then took screenshots of the 1-minute and 5-minute daily charts. Over time he would see these patterns and factors repeat day in and day out. He then crafted his strategy based on these repeating factors.
He has confidence in what he is trading because of backtesting key signals.
He made a database of past stock moves that resembled his setup that he would trade.
Main Setup
He trades “bad stocks” (penny stocks) with dilution. He explains that most companies in the market are greedy and need cash. These companies need capital in order to survive because they are running at a loss. He uses the term “Burn Rate” to quantify this. Because high burn rate, negative cash flow companies need capital to keep operating they will dilute shares (sell shares to the public). To get a premium for the shares they sell, certain companies will “hype up” the stock by releasing news headlines to get the attention of the market to try to boost the price of the stock before they sell their shares to the public.
These are the “bad stocks” that Brian is looking for.
The “Burn Rate” is the rate at which a company spends its cash.
An example of this type of “bad stock” is when the cannabis theme was gaining traction, a cigar company stated they would have blockchain technology. The stock then rose for multiple days after this announcement.
From what I could research, I believe the stock’s name was Rich Cigars Inc. They are delisted from the stock exchange now but in this article they mention that “Rich Cigars Inc, a company that until yesterday said its primary purpose was to “distribute, brand and market tobacco products,” today announced that it was changing its name. Rich Cigars said it would henceforth be called “Intercontinental Technology Inc”, and instead of manufacturing cigars, it would now be mining bitcoin.” The stock then rose 2,233% in one day.
Interviewer Asks: Why is dilution so important in this type of setup?
It comes down to basic supply and demand. When there is an overhead supply, you can expect the stock to fade.
You need to identify edges in this type of dilution.
An example of an edge here is that recurring underwriting companies (of these dilution deals) will come up often. And these underwriting companies will have characteristics associated with them. Some underwriting companies will value the shareholders and not try to pump the stock price before the dilution while others will have frequent deals that will utilize such tactics.
Another way to gain an edge is by looking at the stock’s price history. If the first time the stock spiked from a catalyst and then faded back/ mean reverted, the next time it does that there will be a high chance that it will fade/ mean revert again. He mentions that the more times it does this, the more confident he is in the setup.
An example of this is JAN 0.00%↑, a clinical-stage biopharmaceutical company that over its lifetime, has had violent spikes in price and will revert back to its pre-catalyst price in 1-3 days.
$JAN - Daily Chart (2019/2020)
Factors that contribute to a successful trade include:
Horrible or broken charts where the stock has been down trending for a very long time. Anytime the price spikes on the news, it will fade back to the pre-news event.
This type of short-selling diluted stocks is very similar to Lukas Frohlich’s (The Short Bear) approach to trading. He talks about it as well in his Chat with Traders Interview, here.
Entry
Triggered by indicators. He has customized indicators to fit the specific setup.
These customized indicators are indicators that most traders use but tune them to be slightly faster or slower based on the situation. Therefore he would be faster than the average trader looking at the stock with the same normal type of indicator.
If I had to guess what he is referring to here, I would assume it has to do with shortening or widening the Simple or Exponential Moving Averages to get a jump on the entry.
He states that the best way to get good R:R is to scale into the trade. He usually scales into the trade with 0.5R first before committing fully.
Interviewer Asks: How many times will you try to enter a trade if you get stopped out from a trade?
He focuses on R:R to determine this. For example, when he has a 1:3 RR expected trade, he would set 2 attempts. If after 2 losses on the same ticker, he would expect that his hypothesis on the trade is wrong and stop trading that ticker.
Exit
He uses a price target for his exits.
He states that he is flexible with his price targets and is happy to close a trade when the price is relatively close to his target price
Risk Management
He doesn’t like to risk a fixed percentage of his account because if you start growing the account very fast, the level of risk per trade becomes very large which can affect your mental state.
For example, with a $100,000 account. A 1% risk per trade means every trade you are risking $1,000. If you then had a few exceptional trades in a row, which increased your total capital to $150,000, your risk per trade (at 1%) would be $1,500. With this level of fixed risk, yes you can grow your account rapidly but as your account grows your risk per trade will also scale with it and you might not be comfortable with the big jumps is dollar value.
He suggests picking a static dollar value, for example, $1000 per trade first. Then get comfortable with that level of dollar risk and then move that value after you feel comfortable.
He recommends for smaller accounts to start with a fixed percentage of risk (risk X% per trade) so that you can compound your account to grow rapidly. At a certain point, you may be uncomfortable with the dollar amount risked. From there you can freeze your risk per trade for a period of time before moving it up again.
With Stop Losses (SL); early on in his career he would be very rigid with his SLs meaning he would let the SL be hit every time. Over time he learned that you can recognize if the trade is going against you before it happens and close out your trade before your SL is hit and take a smaller loss.
As a note, this is not a systematic part of his trading but from the experience he gained from trading the setup.
He only holds intraday and not overnight, mostly due to the potential risk of price gapping, as well as locate and brokerage fees being high.
Metrics
Win rate: 26%
Average winner: 6R
Tips for New Traders:
Use a “Max loss per day” if you are having trouble with over-trading or risk management
Systematize your entry and exit points, which allows you to neutralize the emotional aspect of trading
Focus on your Risk to Reward and keep your risk small
Because you don’t have the experience in the beginning