David Capablanca began dabbling in stock trading in 2016. He quickly gravitated toward short selling, which involves borrowing a stock to sell it and buying it back later at a lower price so you can pocket the difference, excluding transaction fees. It's the opposite of betting in favor of a stock and has infinitely more risk.
But Capablanca had an eye for spotting negative indicators that could lead to price plunges. And more than seven years after he started, he's still making bets using a meticulous nine-step process that has helped him limit losses and maintain a win ratio above 90%, according to records of his brokerage accounts previously viewed by Business Insider.
When Capablanca started, he didn't have a set of guidelines for how to short. So he stuck with what he believed was a simpler strategy: spotting so-called "pump and dumps". These are stocks that are promoted to intentionally increase their prices without any fundamentals to back them. They tend to be small-cap or penny stocks. Those who pay for such promotions and traders who understand what might happen plan to sell or short the stock once it's promoted, making money from the temporary rally or the subsequent decline.
He compared it to a Jordan Belfort-style promotion, except it's within the legal realm because there's a disclaimer on the release noting that the post was paid for. He initially heard about this approach through Timothy Sykes, an online-trading teacher who is known for claiming to have turned his bar mitzvah cash gift into over $1 million in gains.
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"In those early days, if it weren't for paid pumps, it would've been a harder time to trade because this was such a clear and easy strategy," Capablanca said.
He referred to it as "free money" because by following some key steps, he remained profitable, making a few hundred dollars a trade while learning to home in on his shorting strategy.
Keep in mind that being a short-seller means your losses could be unlimited because you can't control when or how high a stock's price rises. A trader could have a robust list of reasons a share price should theoretically fall, but that doesn't mean it'll play out that way.
Choosing to be a short-seller is often a personality thing, said Michael Robbins, an author and professor of quantitative investing at Columbia University. You could have a whole system built on a tight formula, but the human and their intuition execute the trade — and most of that is built on experience. Not everyone will be the right fit to succeed at short selling. Even those good at day trading can't master being good at both sides of a trade, longing and shorting, he added.
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Capablanca's steps
There are many sources where stocks can be promoted, including social media platforms and messaging apps like Discord and Telegram. However, Capablanca tracks a handful of public relations firms and websites with a history of promoting paid stock ads. They often send emails with an analyst blurb about the company, a disclaimer indicating it was paid for, and a note on how long the ad will run.
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He reserves an email address for signing up for promotional emails and text alerts. The common sources he said he gets ads from include LifeWater Media, TD Media LLC, and ZipTrader LLC.
Once he gets an ad, he reviews its one-year historical chart to determine how the stock's price behaved in the past. The idea is that regardless of how much a price moves, there will be a mean reversion. If the stock's price has been falling, stagnant, has low volume, or has been pumped and dumped in the past, these indicate that any sudden spike in price will be short-lived.
Another thing he's looking for is what price range the "bag holders" may be stuck at. These traders purchased shares during a previous rally before the price plunged, leaving many stuck in the trade with unrealized losses. This increases the likelihood that there will be a sell-off when the price rises again. He can determine where the sell-off may begin by determining what price range the previous peak, accompanied by volume, was.
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He doesn't read the analyst report but reviews the disclaimer to determine how much had been paid for the promotion. From his experience, if it's $10,000, it's likely to be a short promotion and, therefore, a short pump. But if it's as high as $200,000, he assumes it will be a multiple-day promotion, and the price could rally for weeks with higher price peaks. The disclaimer may also include the number of days they will promote a stock. This means you don't want to begin shorting on the first day, he said.
He checks to see if there are warrants on the stock. A warrant is similar to an options contract, but it is from the company issuing shares. It grants the warrant holder the right to buy or sell shares at a predetermined price. If there's a warrant at a certain price range, there's likely going to be a sell-off at that range, he noted. His target shorting price is usually 15% to 30% above the warrant price.
He checks the borrow fee rate for whether it's above 150%. If so, it's too expensive to try shorting, especially over multiple days.
Finally, he avoids stocks with really low floats, or fewer than one million shares, because the limited supply means any movement in price could cause extreme volatility. If you're a beginner, he recommends avoiding stocks with floats below five million.
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"The smaller the float, the bigger the squeeze. And when you're starting out, your job is to survive," Capablanca said.
Robbins warned that these cheap stocks could look tempting, but the asymmetry in price moves and risk could be steep. The combination of low floats and promotional pumps could send share prices soaring, causing a short squeeze. Additionally, brokerages could pause trading on these stocks because of the volume, which means traders could get stuck in the trade.
To mitigate exposure, Capablanca doesn't slam on a full position at once. Instead, he scales in gradually by shorting when the price is higher and covering his position at multiple price points when it's lower. This also protects him from an incident where the stock crashes suddenly, which can happen in these types of high-risk trades, he said.
While shorting promoted stocks isn't his core strategy today, he uses the promotions as a watchlist as part of an extra step when shorting stocks. If a stock pops up on his scanner, he searches his inbox to see if it had been promoted in the past and uses it as an additional confirmation to short it.
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For example, on January 2, he received an email about a paid promotion from TD Media LLC for Spectral AI (MDAI) that noted the campaign would run until January 5. The outlet was paid $51,000, according to the email. Capablanca added it to his watch list and monitored it. The stock's price began to climb, from $2.46 to $3.07, where it peaked on January 5. Capablanca began shorting the stock on January 11 and 12, the day before it plunged to $2.04. He scaled in and out until January 30 because the stock remained volatile, and he saw additional ads for the stock within the month. He earned total gains of $5,662 from the trade, according to records of his trades viewed by Business Insider.
