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Today’s interview features small-cap short specialist Steven Dux on the Words of Wisdom podcast, recorded during their U.S. tour in California. Dux is the verified eight-figure trader who famously learned the markets in six months and scaled an initial ~$27,000 stake into well over $50 million, including record-breaking single-day and single-month performances. He matters because he blends ruthless risk control with data-backed pattern work—and he’s unusually candid about the psychology mistakes that sink most traders.
In this piece, you’ll learn Dux’s core strategy and why it’s built on human behavior first and statistics second: how he sizes down 50% after any mistake, pays himself aggressively to keep emotions in check, and narrows his playbook to high-probability small-cap setups (think: up >20%, >1M premarket volume, price ≥ $3, low float, sub-$1B market cap—while blacklisting tricky biotech names). We’ll also unpack his “first red day/reaction” short concepts, the idea of retail “dollar blocks” that cap momentum, and how he uses precise historical stats to set entries, exits, and realistic rewards. By the end, you’ll have a beginner-friendly path to think like a pro: risk first, edge quantified, and psychology guarded.
Steven Dux Playbook & Strategy: How He Actually Trades
What He Trades (Universe & Filters)
Dux focuses on liquid small caps that are already moving and attracting retail attention. He narrows the list fast so he can attack only the cleanest A+ plays and ignore the rest.
- Float: ≤ 50M shares (A+ if ≤ 20M)
- Market cap: ≤ $1B (A+ if ≤ $500M)
- Price: $2–$20 (avoid sub-$1 unless exceptional)
- Gap: ≥ +20% premarket, with a catalyst that retail understands (PRs > “mystery” filings)
- Premarket volume: ≥ 1M shares by 9:20 a.m. ET (A+ if ≥ 3M)
- Borrow availability confirmed before 9:25 a.m. if shorting; locate cost ≤ 5% ideal
- Avoid list: biotech binary events, tiny floats with multiple halts already, heavy chat-room manipulation
Core Setups (Backside First Mentality)
He’s hunting for the backside—when momentum stalls and the parabolic move starts failing. Frontside is dangerous; backside is where the probabilities and risk control make sense.
- First Red Day (FRD): Short after the first daily close that’s red following an extended run (≥ 3 strong green days)
- Parabolic Blowoff → Lower High → VWAP Fail: Wait for a clear lower high intraday and a fail at/under VWAP to signal backside
- Gap & Fade: Big premarket gap, weak open, reclaim fails, then trend lower beneath VWAP
- Stuff Move at Key Level: Fast spike into a round number or prior day’s high that immediately rejects on heavy tape speed
Entry Triggers (Timing the Hit)
He avoids guessing tops. He uses structure (levels) plus confirmation (RVOL/tempo) so entries have defined risk and a realistic path to reward.
- Short the first clean lower high into a known level (pre-high, whole/half dollar) with tape slowing
- Require RVOL on the rejection bar ≥ 2 vs. its 5-bar average
- VWAP rejection: Enter on the first lower high that fails under VWAP; add only if a second lower high forms
- Long side exception: On FRD bounces, scalp long only if price reclaims VWAP and holds two 1-min closes with RVOL ≥ 1.5
Risk Management (Non-Negotiables)
Risk comes first. He caps max loss and shrinks size after any mistake, which preserves mental capital and longevity.
- Max loss per trade: ≤ 0.5R of daily max; daily max loss hard-stop (platform + mental)
- “Mistake rule”: After any rule break, immediately cut size by 50% for the next 5 trades
- Hard stop at invalidation (prior swing high for shorts / swing low for longs); no widening
- If two halts against you or SSR triggers against your plan, flatten—no hero holds
Position Sizing (Scale with Control)
Sizing is tied to volatility, borrow cost, and how deep into the pattern you are. He scales in only when the thesis proves itself.
- Starter size at first lower high; add only on confirmation (new lower high + VWAP fail)
- Max size when backside is confirmed AND the borrow cost is reasonable
- ATR filter: Risk per trade sized so stop distance ≈ 0.25–0.35 of the 5-day ATR
- Never add above your average on a short; if you must, you’re wrong—exit and reset
Exit Logic (Pay Yourself Systematically)
He takes profits into flushes and keeps a portion for trend. No “all or nothing”—he wants realized P&L locking in his edge.
- First target: prior pivot low or morning panic low; take 30–50% off there
- Trail remainder using VWAP or 9/20 EMA; cover on two 1-min closes above VWAP (shorts)
- If range compresses and RVOL decays below 1.0 for 10–15 minutes, exit remaining
- End-of-day rule: No fresh shorts after 2:45 p.m. ET; manage existing only
VWAP & Levels (His North Star)
VWAP is the control line. Combined with whole/half-dollar levels and prior-day highs, it defines where trapped traders are sitting.
- Only short below VWAP; only long above VWAP (exceptions need A+ reasons)
- Prefer entries at/near whole or half-dollar inflections (e.g., 4.50, 5.00)
- If price reclaims VWAP with strength and holds 5+ minutes, exit shorts—thesis is likely invalid
- Use premarket high and prior day’s high as decision points for rejects or breakouts
Halts, SSR, and “Do Not Touch” Moments
Parabolic halts and SSR flips can distort the tape. He uses simple guardrails to avoid account-killers.
- Two consecutive upside halts: stand down; wait for post-halt lower high under VWAP to engage
- SSR triggered (−10% from prior close): avoid chasing; use pops to short into resistance with tight risk
- If spreads widen > 0.5–1.0% of price or liquidity vanishes, reduce size or step aside
- If borrow gets yanked or costs spike intraday, take profits faster and avoid adds
Morning Game Plan (Pre-Market to Open)
He walks in with a ranked list, clear levels, and borrow status sorted. Preparation removes hesitation at the bell.
- 7:30–9:00 a.m. ET: Build a watchlist of 3–5 names that meet the universe filters
- Mark premarket high/low, key whole/half levels, and VWAP once it prints
- Secure borrows/locates and note borrow rate; set alerts ±1–2% around levels
- Decide “frontside = no touch” vs. “backside confirmation = engage”
Tape & RVOL Tells (Confirmation vs. Noise)
He lets the tape prove that momentum is dying. When volume can’t sustain new highs, odds swing his way.
- Require failed push with thinner bids and slower prints at prior high
- RVOL on push < RVOL on reject bar = green flag for short
- Watch for time-of-day fade: 10:15–11:30 a.m. ET often marks exhaustion on small caps
- If big bid support appears repeatedly and holds, don’t fight—wait or exit
Stats & Journaling (Edge That Compounds)
Dux is maniacal about stats. He tracks patterns to know exactly where his edge lives and where it doesn’t.
- Log every trade: setup tag, float, market cap, borrow cost, RVOL, entry/exit vs. VWAP, result in R
- Weekly review: top 2 setups only—cut anything with < 55% win rate or poor R multiple
- Track “mistake category” and apply the 50% size cut for 5 trades after any rule break
- Build baseline stats: average drawdown before target, typical time-in-trade, and best exit method by setup
Psychology & Pay-Yourself Routine
He reduces emotional swings by banking wins and keeping risk small when he’s off. That keeps him consistent month to month.
- Withdraw a fixed % of weekly realized profits to a “cold” account
- If red two days in a row, cut size by 30–50% next day; focus only on A+ setups
- One active trade at a time during the open for clarity; no FOMO adds
- Daily reset after max loss: stop trading for the day—no exceptions
Clean Longs (When He Flips the Script)
He’s primarily a short seller, but he will take clean long momentum when the tape says so and the path is obvious.
- Criteria: fresh news catalyst, float ≤ 20M, VWAP reclaim + higher low, RVOL ≥ 3
- Entry on the first pullback that holds above VWAP; stop a few cents under VWAP or the pullback low
- Scale out into prior high and measured move (opening leg length)
- No longs into third push if RVOL is decaying and wicks are growing—walk away
Afternoon Rules (Protect the Bag)
The afternoon is for managing existing winners, not initiating new gambles. Liquidity thins and traps multiply.
- No new positions after 1:30 p.m. ET unless it’s a backside layup with tiny risk
- Cover/trim more aggressively into 2:30–3:30 p.m. ET illiquidity windows
- If still in a trend, trail with VWAP/EMA; if VWAP reclaims against your short, exit
- No “end-of-day hero” adds—protect realized gains and stats integrity
Size Like a Pro: Risk First, P&L Second
Steven Dux doesn’t chase big wins—he sizes so big losses never show up. He fixes risk per trade first, then lets P&L be a byproduct of clean execution. That means a hard daily max loss, predefined stop distance, and no adding above average if he’s short. If a rule is broken, he cuts the size by half for the next few trades to reset discipline.
Dux also ties size to volatility and structure, not vibes. He scales only after the setup proves itself—lower high plus VWAP fail for shorts, or a VWAP reclaim with RVOL for longs. When liquidity thins or spreads widen, he reduces size or steps aside. The result: consistent expectancy, fewer blowups, and a playbook that survives bad days.
Allocate by Volatility: Scale Exposure Only When Range Pays
Steven Dux doesn’t treat every day the same—he lets volatility tell him how much to risk. When a ticker’s average true range explodes and RVOL confirms real participation, he’s willing to press; when range compresses, he automatically dials back. The idea is simple: more movement equals more opportunity, less movement equals defense mode. That keeps him from forcing size on sleepy price action.
Dux also ties adds to structure, not excitement. If a backside confirms—lower high under VWAP with momentum fading—he’ll scale in, but only within a pre-set risk envelope derived from current ATR. If spreads widen or halts distort the tape, he slashes size or exits and waits for a cleaner range. By sizing with volatility, he protects the downside on slow days and harvests the upside when the market is actually paying.
Diversify Smart: Mix Underlyings, Strategies, and Trade Durations
Steven Dux spreads risk across uncorrelated ideas instead of letting one hot theme own his P&L. He limits exposure to any single ticker, sector, or catalyst type so a biotech headline or meme squeeze can’t nuke the day. Within small caps, he’ll rotate between clean backside shorts, occasional VWAP-reclaim longs, and gap-and-fade plays, but never overloads one pattern at once.
Dux also diversifies by time in trade. He takes quick morning scalps when range is highest, then holds smaller “backside trend” pieces into midday only if VWAP/EMAs cooperate. He caps concurrent positions (e.g., one A-setup plus one B-setup) and sets a per-theme daily max so choppy markets don’t grind him down. The net effect: steadier equity curve, fewer blowups, and more shots on goal when the market rotates.
Trade the Mechanics, Not Predictions: Rules Over Gut Feelings
Steven Dux isn’t guessing where a stock “should” go—he’s following mechanics he can repeat. He waits for structure like a lower high under VWAP, confirms with RVOL, and only then engages. If price reclaims VWAP with strength, he’s out—no debate, no ego. Every decision is an if-then rule that keeps him from narrating the future.
Dux treats the chart like a machine: inputs are levels and volume, outputs are entries, stops, and scales. He uses pre-planned invalidation (prior swing) and never widens a stop because “it might come back.” Green bars on shrinking RVOL into resistance? He leans short; expanding RVOL through levels? He steps aside or flips bias only with a defined risk. By trusting mechanics over prediction, he trades what’s happening—not what he hopes will happen.
Choose Defined Risk When Edge Is Thin; Avoid Open-Ended Losses
When Steven Dux senses his edge isn’t blazing—choppy tape, mixed signals, shrinking RVOL—he flips to strict, defined risk. That means tight invalidation at a nearby swing, smaller initial size, and zero tolerance for widening stops “just in case.” If price reclaims VWAP against his short, he’s flat—no averaging up, no hoping. One clean stop is cheaper than a slow bleed.
Dux also avoids situations that turn defined risk into undefined pain. He won’t hold through binary catalysts or stacked upside halts where slippage can skip past stops. If spreads blow out or borrow cost spikes, he cuts risk and reduces hold time, treating any gains as a scalp, not a campaign. By keeping risk boxed in when conditions are meh, he preserves capital for the A+ stretches that actually pay.
In the end, this trader’s edge isn’t a hot call—it’s a system. He defines risk first, sizes positions to volatility, and only scales when structure confirms (think VWAP rejections, clean lower highs, and RVOL that actually matters). Frontside hype is a pass; the backside is where he works, using whole/half-dollar levels and prior highs as decision points. If price reclaims VWAP with strength, he’s out. No widening stops, no averaging into pain, and no “it might come back.”
He protects the equity curve with simple guardrails: a hard daily max loss, a “mistake rule” that cuts size by 50% after any lapse, and a pay-yourself routine that locks in realized gains. He avoids undefined risk—binary catalysts, stacked halts, blown-out spreads—and treats borrow cost and liquidity as part of the setup, not an afterthought. The journal closes the loop: tag every trade, track win rate and R by setup, cut what underperforms, and concentrate capital where stats prove edge. That’s the real secret sauce—boring consistency that outlasts the market’s drama.
