David Capablanca began shorting stocks in 2016 but didn’t become successful until 2020. Once a stock rallies, he looks for 9 data points that indicate it is about to plunge. He compares his process to a pilot’s flight checklist: if everything aligns, it’s a go. David Capablanca dreamed of becoming an architect and building structures that would last long after he was gone.
He pursued that goal by graduating from the University of Florida with a bachelor of design in architecture, and then, in 2016, earning a graduate degree from the University of California, Los Angeles.
But when he entered the workforce as a junior architect making about $28 an hour, he realized it would take over a decade to pay off his student loans. After being in school for many years, he also had to factor in his bad credit score, rent, and a car bill.
Until then, he hadn’t thought much about making a lot of money. His focus was on pursuing his passion. But when the doctor told him he would have two weeks to live because of a brain tumor if he did not undergo brain surgery, he had a new lease on life, he said.
“The doctor gave me 50 years of life,” Capablanca told Insider. “I need to make those 50 years count. I can’t waste those years being in debt all the time. The whole life of bad credit had to stop, and debt and stress. I was calling my parents when I was 30 years old for help to pay my rent — that had to stop.”
He first considered real estate as an alternative. Since he understood architecture, he thought he could easily sell houses. But as he continued researching online, he came across the idea of stock trading. Specifically, he found Timothy Sykes, a trading teacher and former penny-stock trader known for claiming to flip his bar mitzvah cash gift into over $1 million in gains. Sykes was offering online courses on how to trade penny stocks.
Capablanca initially thought it was a scam, but it piqued his curiosity. So he began consuming Sykes’ free content and then contacted some of his students to see if they were real. Three months later, he decided to sign up. He pooled the money he’d made from doing odd jobs such as tutoring, dog sitting, and food delivery to pay about $6,000 for the Millionaire Trading Challenge course.
By the end of 2016, he began making small trades worth a few hundred dollars. His favorite trade was short selling — borrowing a stock to sell it, buy it back later, and pocket the difference if it dropped — because he could spot how a discrepancy could lead to a price plunge after a brief rally. At the time, he didn’t meet the pattern day trading rule, which requires an account to have a minimum of $25,000. Unable to make intra-day trades, he would hold small positions overnight.
He continued to practice with small amounts until 2020 when the stock market became volatile. He witnessed companies, such as biotech and pharmaceutical firms, that lacked fundamentals rally by hundreds of percentages.
He saw it as a once-in-a-decade opportunity to make money shorting stocks. Capablanca decided it was time to top off his account to meet the PDT.
“When thinking back at those times, that was the right time to put on the risk and do what I did,” Capablanca said.
Insider viewed monthly brokerage statements of Capablanca’s trades between February 2021 and April 2023. According to TraderSync, an online trading journal that tracks performance, his current win ratio is 94.91%. David Olivares, the chief technology officer at TraderSync, examined the statistics against Capablanca’s Interactive Broker statements and raw trades obtained through the Interactive Broker API, and cross-checked some transactions from his Cobra account. Olivares noted a potential margin of error of 2%, bringing TraderSync’s 91.57% win ratio for Interactive Brokers to 90%. Capablanca uses up to six trading accounts; Interactive Brokers and Cobra make up most of his gains. Six of his accounts had win ratios between 92% and 97.66%.
Using multiple accounts allows him to limit risk trading one stock at a time in an account. This way, he isn’t tempted to put on a larger cash position on any given trade. Additionally, he can shop around for the best locate fee, or a flat per-share fee to borrow shares to short sell.
Norman Zadeh, founder of the United States Investing Championship, warns of the downside of being a short seller. The risk associated with this type of trade is higher because the losses could be bottomless. He noted that when you sell a stock short, your gain is limited to the value of the stock. However, your loss is unlimited, depending on how high a stock’s price could rally.
“Every few years, someone will come along, like a Jim Chanos, or a John Paulson, who carefully analyzes a company or a sector and realizes that it is likely to crash. If you study their records, you will find that as great as they may be, and as much money as they have made, they have made other trades that did not work out. I believe that it is also possible to make money day trading from the short side, but that is more difficult than day trading from the long side, because of the difficulty in borrowing the stock. The number of people who can do that is very, very small,” Zadeh wrote in an email to Insider.
Capablanca uses a checklist which he compares to a pilot’s flight checklist and notes that you must be meticulous when you run through the process.
A 9-indicator processA stock shows up on his scanner if it’s up by 40% on the day. Once it appears on his radar, he does his due diligence to see if it fits the criteria of a good short trade. A big part of his strategy is avoiding trades that could be very disastrous, and a few indicators could signal that.
First, he checks the news to determine the catalyst behind the rally. When a small company’s stock rapidly increases in price, it’s often due to hype news, like a pharmaceutical company’s drug that passes phase-one testing. However, it still has many phases to go before a drug could be released. Therefore, the rally is likely to be short-lived and the share price may revert.
On February 23, Genprex (GNPX), a gene therapy company, showed up on his scanner after it went from $1.80 to $2.11 in four minutes during pre-market trading. He previously shorted the stock because he had received paid, promotional emails about the company and believed it was being hyped. He shorted the stock again, this time at $1.91, and covered his position at about $1.87 for a profit of $1,811, according to his Success Trader brokerage statement and TraderSync.
He avoids stocks with small floats, which is the number of shares available for the public to trade, because they can be moved by little volume. A stock can be trading for $1 a share and suddenly shoot up to $100, he said. If a stock’s float is less than a million, he won’t short it.
Conversely, floats above 20 million are less favorable because they aren’t as volatile. They are often more prominent companies with institutional investors who tend to hold their shares long-term. His sweet spot is stocks with a float between 5 million to 20 million.
For the same reason, he avoids stocks with a market cap above $250 million, which could indicate high institutional ownership.
“It’s a red flag,” Capablanca said. “These institutional investors, first of all, believe in the company. These are sophisticated people with a lot of money, way more money than I have. And on top of that, because they have a lot of money, they have a lot of algorithms.”
Precisely, he avoids stocks that have over 40% institutional ownership.
While he’s willing to short a stock as cheap as $0.60, stocks priced below $2 a share are less favorable because it’s harder to predict how high the price can go. Similar to a low float, cheap stocks can be extremely volatile, he said.
On March 20, he noticed CISO Global (CISO) after it spiked by about 197% from $0.21 to $0.91 during after-hours trading after the company released its earnings after hours. Since the stock’s price was below $2, he waited for a reversal for confirmation. As the price began to drop, he shorted 49,200 shares at $0.69 and covered his position at about $0.67 for a profit of $984, according to his Cobra brokerage statement and TraderSync. Since the stock was trading below $2, he didn’t scale in with a relatively large position.
On the other end, the highest share price he shorts is $15. Prices above that range can indicate a healthy company with more robust fundamentals and more institutional ownership.
The short interest rate could indicate how many traders are trying to short a stock. However, this rate is reported biweekly. Therefore, he uses the borrow fee rate, which is the broker’s fee for lending shares to short sell, as an intraday indicator of short interest rates. The higher the demand for borrowing, the higher the fee. There are likely too many short sellers if the cost is above 80% for small-cap stocks with low floats. This could result in a short squeeze, he noted.
“Interactive Brokers aggregates the borrow fee rate from a multitude of brokers and comes up with an average borrow fee rate. And I use that as an intraday short interest indicator,” Capablanca said.
He looks for potential dilution. If a company has less than three months of cash available, it’s a good candidate to short because it’ll need to raise cash soon and likely make a stock offering or an At The Market Agreement (ATM). This is when a company sells newly created shares and dilutes shareholders.
Finally, he looks at the one-year historical chart to determine where there may be “bag holders” or those that bought the stock at a high price and couldn’t sell in time. These holders often wait for the price to retrace to dump their shares. This is usually indicated by the stock’s previous high in combination with high volume.
The perfect setup is when all of the above indicators converge, he said. If a stock with a market cap below $250 million is up by more than 40%, the company has less than three months of cash, with a float between 10 to 15 million and a borrow fee of less than 80%, and no news or fluff news, “this is a beautiful stock to short, of course I’m going to short it”, Capablanca said.
Hot sectors are dangerous to trade, even when the indicators add up, he noted. For example, on March 3, 2021, Super League Gaming (SLGG) showed up on his scanner after it had rallied above 40% accompanied by high volume. He recalled it had a float above 10 million. At the time, the fundamentals didn’t add up and there was no news catalyst. He shorted the stock at around $4.98 but the stock didn’t plunge and instead, it kept rallying. He covered his position at $6.97 for a loss of $19,000, according to his TraderSync.
One thing he missed was that the stock was a sympathy play against Gamestop and there was hype on Reddit and Twitter around the ticker.