How to Properly Manage Risk in a Raging Bull Market | Podcast Episode #1

0:00
All right, let’s get this podcast underway. This is my first podcast that I’ve done with you guys so far, and I’m looking forward to doing many more. Basically, what I want this podcast to be, what the purpose of it is, is to be able to communicate with you some of my trading principles, the strategies that I use, and also mix it in with the current market environments that we’re experiencing, how my thinking goes along with, you know, like this crazy bull market that we’re in right now versus When that tide comes and we start selling off again and eventually that will happen and how, how I’m going to respond there and, and, and how to navigate those difficult markets because bullish market or bearish market, I expect to make money if the market’s trading sideways, I expect to make money on that too.

0:45
It’s. That’s what I’m in it for. I’m a full-time trader. This is what I do. And, uh, the podcast is gonna be a great vehicle for me to be able to communicate with you more directly and, in more detail than maybe what a typical blog post allows me to do and, and to be able to just conquer these markets together, I guess it’s probably the best way to put it.

1:05
But if you look at the market right now, the S&P 500, the NASDAQ, The Dow Jones Industrial Average. The Russell, they’re all trading at like all-time highs. I mean, it is really crazy how bullish this market is, and it’s.

1:24
Maybe it’s bullish to us because we’ve been in all this sideways consolidation and been nailed with all these shock events from the Brexit to the Trump election to the Italian referendum and. So maybe this, this all-out bullish effort is just kind of like something our system isn’t used to after all of the crazy sideways trading that we saw in 2015, and then again in 2016, and some of the sell-offs and the shock events in 2016.

1:56
To now where once Trump got elected and the market started taking off that week of the election and has pretty much since continued to move higher, we had that consolidation in late December and January and then finally it broke out of that range and since then, I think there’s only been two trading days in February where we have actually finished lower and if I look at the chart right now as I’m talking with you, we have.

2:22
Like 9 out of the last 10 days have finished higher. I, I believe that’s correct, but in any case, it’s crazy. I mean, really, really crazy how bullish this market’s become. And if you look at some of these segments like on Fast Money where they’re just saying that the only strategy out there is to just buy everything, I mean, that’s kind of teetering on some bad advice.

2:42
Actually, it’s not teetering, it is bad advice because no matter the market, you have to stay disciplined. You can’t just say, well, Everybody’s buying the dip. I’m just gonna buy the dip no matter what. You have to stay disciplined, even in the most bullish markets because guess what?

2:58
Eventually bull markets do end. I don’t know when it will end or how it will end, but eventually they do end. There’s always. The chickens always come home to roost. There’s always a payday someday, OK, to throw a whole bunch of cliches out there at you, but you have to manage the risk.

3:16
And if you don’t take the markets just as serious in a raging bull market where the long positions just keep coming very easily. Uh, or the profits on their long positions keep coming very easily, you’re going to make mistakes. You’re going to ultimately be disappointed by this market because while the market’s taken the stair steps, stair step in its way higher.

3:38
When it ends, it takes the elevator lower almost every time. It doesn’t just coerce you out of your long positions. It, it’s not like the soothing sell-off that says, OK, maybe it’s the time to go ahead and start booking profits. Yeah, it feels about that time. No, it’s like a slap in the face.

3:55
It’s going to hit you hard and it’s going to hit you fast. And if you’re not ready for it. You’re gonna lose all those profits.

4:22
So staying disciplined in these kinds of markets is just as important as staying disciplined in a sideways market where you’re trying to, uh, not force positions or in a bear market where you’re being aggressive with the short positions, but you’re also taking profits aggressively too to make sure you don’t get caught in a dead cat bounce.

4:44
So. And the bullish markets, and the bearish markets, and the sideways markets. Everything revolves around discipline, because you gotta be starting to look a couple of steps ahead, OK? Yeah, maybe we go up higher tomorrow, and the next day, and the next day, and the next day after that, but you gotta be ready for the time that the next day doesn’t produce that.

5:05
You know, expected gain for you in the stock market and things start to sell off that there’s maybe some news pieces that start coming in to say, uh oh, things aren’t as good as we thought it was, or, hey, guess what, there’s no buyers left. There’s no buyers left at 2600 or 2700 or 2800 or however high we go, but however high we do go, you have to maintain that discipline.

5:32
So I know I’m kind of sounding like a, uh, broken record here, but it’s important for you to remember that. Keeping your discipline. Holding on to those gains, raising stop losses, that’s one of the biggest tools that I’m using right now, because it’s really hard to go shorting stocks right now, and I’ve done a little bit of it, but not, not to where it takes a big part of my portfolio.

5:48
I’ve really just been taking, um, short positions, um, to sort of hedge my loans, of whether it’s over a three day weekend or whether it’s, um. The market may show some cracks or potential signs for a more extended sell-off.

6:11
I’ll go ahead and add a hedge position, not so much because. I’m trying to make a lot of money off of these short positions or because I think that that’s the, that’s the way to, uh, Massive gains because it’s not more than likely I’m going to lose on those short positions because this market is in this unfettered bull rally.

6:35
But what it does do is is it provides me some flexibility that If this is indeed the time where the market starts to sell off, I have the flexibility to flip that portfolio from a net long situation to be in a net short, so I already have a little bit of a start there, and that has served me well, actually, very well over the years, and something that I want to continue to be able to do, um.

6:53
In the days and weeks ahead, and, and no, hedging, hedging profits when the market just keeps going up day after day after day. It’s not fun. It’s not something that I, I enjoy doing. In fact, a lot of times I just feel like I’m throwing money away, but I’ve done this a long time and I’ve done this long enough to know that.

7:13
I’m usually pretty happy that I did it when I look back and when that market eventually turns because I’m, I’m at the, uh, right there at the cusp of when the market starts turning to be able to start adding more short positions, start to pull out of the long positions, and I’m able to do that without hurting the profits that I made on the rally up, you see.

7:35
There’s gonna be a lot of people in this current market rally that will lose all the profits that they made, and it’s going to, and, and they’ll probably take on big losses, simply because. Let’s say they grew their account from $100,000 to $125,000 OK, during this run since, since November.

7:56
So that’s like 4 months, right? They, they grow their account and everything, and all of a sudden the market starts selling off. Well, they’re going to say, well, I, I had $125,000 in my account, and the market’s now pulled back 3 or 4%, and my portfolio has dropped from 125, down to $115,000.

8:11
Well, in the back of their head, they’re going to be thinking all along, I had $125,000 I had $125,000. So, here’s what they’ll start to do. This is what the traders will start doing, and it’s a losing proposition. Trust me, it is a major losing proposition, but this is what they’ll do.

8:27
They’ll start to say, well, I had 125,000, I’ll wait for it to get back up there, and I’ll cut my game, or cut my uh position long positions out, I’ll get out of the market, OK? But it doesn’t do that all the time, and most times when it starts to start pulled back dramatically.

8:47
Those positions that had the big, big runs, they’re the ones that usually see the biggest profit taking because there’s so many people trying to get all out at once and make sure that they insure some of their profits. So that stock that went ran up 20%, you know, within a couple over, over the course of like 3 or 4 months, that thing could lose 10% and.

9:03
A matter of a few days, and, and the market maybe only pulls back 3 or 4% in the process. So, so you can start seeing these big, big pullbacks where you’re losing a lot of your gains and everything else, but in the back of your mind, you’re going to be saying, but I had $125,000 in my account.

9:21
I had Netflix at $145 and now it’s at $120. If I can just get Netflix back up to $145 I’ll cut my losses, or not my losses, but I’ll go ahead and book my gains and The market doesn’t cooperate with you like that. It doesn’t care what your portfolio was at.

9:42
It doesn’t care where you were trading at, or how profitable you were, or how good of a run you were on. It simply doesn’t care. It’s going to do what it wants, and you have to respect the market in that way. So, one of the most effective ways that I’ve been Preserving profits in this market is simply by raising my stock losses.

10:02
I bought FLEX, that’s Flex Technology, I think is the name of the company, to be specific. Um, I bought that at 1562, OK. I think I had somewhere like a stop loss of 1529 or 1528.

10:18
Nonetheless, this stock has been going up consistently for me day after day after day. OK? My number one thought isn’t. You know, how do I get out at the very top of this run? In fact, I don’t think about that at all. It is not a priority for me whatsoever, OK?

10:39
What I’m thinking about is, is how do I manage the risk? And when you manage the risk, and this is something I’ve always said, if you manage the risk, the profits will take care of themselves. They always take care of themselves, and that’s the mindset of a successful trader is managing risk, being consumed with risk.

11:01
And so, what I do is, is I go ahead and look at the trade. I try to find levels of support to where I know that if that level of support, that short term level of support is broken. That the trade is no longer valid, that maybe there’s going to be a bigger pullback, or that the buyers are finally done with this trade and they’re ready to move on.

11:18
And I’ve got a number of positions in my portfolio right now where I’m doing that with. I’ve got Baidu, which, you know, continues to move up in price, and, and I’ll, they have a earnings report coming up. I’ll go ahead and get out of that before the earnings because I really, yeah, I can score big by holding it through earnings.

11:40
I get that a lot of people do make money through earnings, but a lot of people lose money too, and that’s not something that I’ve been holding Baidu since February 3rd. I’m up about 6.25% on the trade. Nice trade, good trade. But I’m not gonna hold it through earnings and let, you know, 18 calendar days’ worth of gains go down the tubes because somebody didn’t like the earnings report.

12:03
I’m gonna go ahead and book that, those gains right before the earnings and uh move on to the next trade because that’s really what we’re doing. We’re trying to profit in trades and then move on to the next trade where we can profit, but we don’t. want to hold on to losers that become bigger losers, because all of our trades thereafter will result in us just trying to make up for those gains on the bad trades that that we refuse to, to take a loss on.

12:22
So, with Flex, FLEX, this trade that I’m in right now, I’m up 6.25%, or actually, I’m up 7.5% on Flex. So I got in at 1,562, I had about a 2-3% stop loss on it. Since then, I think I’ve raised my stop loss about 4 times on this trade, OK?

12:39
Maybe it goes up another 10%. Maybe it doesn’t go up any more at all, and that’s OK too, because what I will do is make sure that I’m not going to, you know, be caught holding the bag while everybody else gets out. When my stop losses get hit, I’m gonna be done with it.

13:05
So, at the end of today, it traded at, it closed the day at 1,679. And I’ve got right now a stop loss at 1,624, so I’m assured to come out with some decent sizable gains, and I’ll probably raise the stop even further tomorrow morning because I’m gonna want to make sure that when this market does pull back, that I am not letting all my profits turn into big losses or losing a big majority of my profits.

13:25
I don’t want that to happen. So. My way of managing this market, and I don’t. And let me back up a little bit here too, is I don’t like using trailing stops. I, I don’t think that just, you know, setting a 2% arbitrary stop loss where you’re not really thinking about where you want those stops to, to go, you’re just doing 2%.

13:42
That’s a lazy way. Do the homework. Look at the price charts, look at where there is support and resistance and, and mark your, your, uh, spots on the chart. So if there’s like right now, and, you know, with FLEX.

14:11
It’s trade closed at 1679. Let’s just say for a pure example standpoint, there’s a huge support level at 16. 55, OK. Maybe I put my pennies or my stop loss a few pennies below that 1,655 stop loss and say like 1,653, because I know at that point, if it breaks through that 1,655 level and goes a little bit lower, there is a change in behavior in the stock, OK?

14:28
And we don’t want to hold on to that anymore. Get out of the trade, don’t second guess the price action, OK? Just move on. And that’s what you’re gonna have to do in this bull market. It’s easy to drop your guard. 99% of all traders have already dropped their guard.

14:43
They just, they’re relaxed, they’re not worried when they look at their futures on their cell phone, when they wake up in the morning. That’s actually the first thing I do when I wake up. Um, I’m sort of curious about what happened while I was sleeping at night, but, um, yeah, people aren’t really fearful.

15:02
I remember. When we’re going through the through the Brexit, or I, I even really vividly remember the summer of 2011 where the market was just selling off so hard, so fast, and you would wake up and the Dow or the S&P futures would be down like 40 points, OK.

15:22
And it was really, whether you were long or short, I would remember you would like kind of hold your breath as you turned on like a, for, for me it’s Think or swim. I would turn on my Think or Swim app and I’d see what the futures were doing overnight and you’d just be holding your breath for, for that screen to pop up to tell you what the markets were doing.

15:40
So, that’s what. The people have sort of lost touch with. They’re not worried about this market anymore. They don’t sweat it. They just are way too relaxed. And it’s when you get that relaxed, when people aren’t worried about anything.

15:58
I mean, let’s, let’s look at what we got here. We got Baron’s putting on the front page of their, of their magazine, Dow 30,000. OK. Barron’s is usually the kiss of death for the market. It hasn’t happened yet, but let’s go ahead and double down on that and have Dennis Gartman talk about the market’s gonna be bullish until it’s not bullish.

16:19
I don’t even know what that means, but it means something. It means that he’s bullish, basically, OK? It means that he’s flipped again from his short positions to his long positions and everything’s fine and dandy in the world, OK. My gosh, I, that guy is like the ultimate contrarian indicator.

16:38
He is long as of last week and the market hasn’t buckled yet. That’s impressive in and of its own. Then you get Donald Trump bragging about how great the stock market is and, and, uh, how great it is, and then you have Fast Money that talks about just buy everything. There’s nothing that you can’t buy, just buy it all, OK?

16:58
So, People are relaxed in this market. I mean, extremely relaxed, and that’s a very dangerous scenario to be in. You don’t want to be like that. You get caught with your pants down and you get hammered for, for being too nonchalant about the stock market, OK?

17:26
I’m probably one, I’m like an old prune here, OK? I’m like, I’m still hammering risk in a market that feels like there is no risk. And, and I get that that is not a very sexy thing to talk about, but if you want to make sure that you come out of this bull market with your profits in hand, you better keep focusing on risk because there will be a day and there’ll be a time when the market ceases to cooperate for the bulls, and it will.

17:41
Wreak havoc on their portfolios because they didn’t respect the risk that was in front of them that they never paid any attention to and there’s a lot of bearish divergences out there. One of the key indicators that I like to track is called the T2108 indicator.

17:56
It’s something that I use through. The, the warden, um, stock charts and what it does is it provides you with a. Readout of the percentage of stocks that are trading above their 40 day moving average and right now it’s at 69%, but we were trading at highs, all-time highs are like, you know, maybe like a 0.5% off of the all-time highs a couple of weeks ago, and we had less than 50% of stocks trading above their 40 day moving average, and that was huge divergence.

18:12
It’s now improved quite a bit. It was up 7.5%, up to 69% of stocks are trading above their 40 day moving average, and that’s pretty impressive there, but. Uh, it’s still, it’s still diverging. It’s, it’s not on par with where it should be. Markets trading day after day after day at new all-time highs.

18:31
My gosh, the, the T2108 or the percentage of stocks trading above their 40-day moving average should be at like 85, 90%, and it’s not. So there’s still a lot of stocks that are struggling beneath the surface. They’re not quite rallying with this market, and you’ve got to be aware of that.

18:49
And, uh, another thing that I would recommend you watch for is for stocks that are trading at their all-time highs, and they’re consolidating at their all-time highs, and then all of a sudden they break out. But instead of breaking out and, and, and getting that follow through and multi days of consecutive gains and all that stuff, they just start falling off.

19:05
And I’ve been noticing that in the last few days we’re, we’re seeing stocks like Caterpillar, CAT. It looked like it was going to break out today and have another big day and all that stuff, and it, and it didn’t. It just, it sold off. It, it couldn’t hold those gains.

19:40
So you want to be cognizant of. Of stocks as a as a collective whole that you’re seeing they’re breaking out, and they’re usually good technically reliable stocks that are simply not breaking out and following through to the upside, because that’s going to start showing you signs that the buyers are getting exhausted and they can’t continue to sustain these market gains day after day after day after day.

20:02
So, I’ve thrown a lot at you, man, I care about your trading. I care about your success in this market, and I, I, I really do want you to be successful in, in your trading endeavors. And the only way you can do that is if you continue to respect the risk, no matter the market, no matter the market, respect it.

20:19
Don’t get comfortable because it’s when You get comfortable with this market that the market just slaps you sideways into Sunday, and you don’t want that. You don’t wanna. You don’t want to ignore the, the, the risks that come with the market regardless of the conditions that, that you’re trading in.

20:35
And then you hear my voice in the background that says, you should have been paying close attention to the risk on your trade, OK? I’m not telling you anything that’s gonna lead you astray. I’m just trying to help you make sure that you preserve those profits, and that’s what you wanna do.

21:02
That’s how you succeed in the market, OK? Well, this is gonna be the first podcast that I’ve done. I, I feel like we’ve hit a lot of, uh, good topics here. It’s probably not the most sexy topic considering the kind of market conditions that we are in the middle of, but nonetheless, I want you guys to, uh, do well, succeed, and to make that risk your first priority, um, when it comes to trading.

21:19
So, I enjoyed this first podcast. I’m looking forward to podcast number 2 and, and many more thereafter. And, uh, I hope you guys have a great day of trading tomorrow and the days and weeks ahead.