Stop Losses and Partial Profits | Podcast Episode #141

0:00
Hey, everybody, this is Ryan Mallory with Swing Trading the Stock Market. We got a good episode to tackle here today. It comes from a guy named, and it’s not his real name. It’s John Boy from the Waltons, remember that? So, John Boy here gives me a very succinct and to the point email.

0:18
He says, Ryan, I buy a stock at 20 and it explodes over 8 weeks by 100%. It’s a good stock practice to keep the stock loss. $2 behind. And keep all the shares until it eventually starts to sell off, or would it be better practice to be pulling out the gains here and there.

0:39
I haven’t heard you discuss anything like this so far in any episodes, so I figured I’d ask. Thank you. I do talk about it some, uh, the partial profits, and I’m pretty sure I’ve talked about some profit taking strategies. There’s a, there’s a myriad of different takes on profit taking. I’m gonna tell you about mine here in this episode, but Uh, there, there’s no perfect way to do it.

0:59
Really, when you’re, you’re taking profits, you’re really guarding against risk. And before I get into this topic, what do I have to drink today? I have Woodford Reserve. Kentucky Straight bourbon whiskey, it’s 45.2% alcohol and 90.4% proof.

1:17
W for reserve too, it has a nice, nice bottle. I mean, it’s one of the slickest looking bottles out there. I like the cork, I like the shape of the bottle. I like how smooth it is. It’s just a nice bottle. And when you drink it, it’s got like this, this coolness, right? And then it gives you a little bit of heat, and then it comes back and gives you a little bit of like a wood type flavor.

1:37
So I like, I like it. It’s a good, it’s a good one. Now, I’ll give it like 64 and it’s a good price bottle too. I think for this one I paid like $26 at Sam’s Club. Uh, again, I’m not trying to plug them, but it’s a, it’s a good bottle. It’s, it’s not a bad, uh, bourbon at all. It’s kind of like middle of the road in my opinion.

1:54
It’s like there with like Knob Creek and bullet bourbon, 4 roses. It’s not gonna disappoint you. It’s gonna be a consistent flavor every time you drink it. It’s, it’s just nice. So a 65 is what I give it. Now, about this John boy.

2:10
He tells you here, hey, I bought a stock at $20. It’s gone up to $40 a share now. Essentially what he talks about is he wants to put a trailing stop on there or at least that’s my take from the email. So, You do a 2% stop loss, right? And it’s trading at $40. You got in at 20%.

2:25
Well, that’s really like a 10% stop loss against your original position, but considering the fact that it’s gone up 100%, it’s really like a 5% stop loss. So a 2% stop loss at 20%, that in my opinion would be a higher risk trade, but when you already have a 100% of profits on the trade, You can afford to take a bigger stop loss because it’s trading at such a higher price.

2:45
So for me, I, I like to take partial profits and I think it’s such a good practice for so many traders to do nowadays, especially with free commissions, because before, OK, you know, you could pay like $10 for a commission.

3:00
And I remember back in the day when it was like $20 just to get into a trade.

3:19
In the sense that you’re not paying a commission. So back in the day for me, OK, if I was like, I think it was like back in like early 2000s, if I made a trade, it was like $20 a trade, kid you not. So I get in. And let’s say I’m like trading with like a $5000 trade, right?

3:36
I get in and it’s like $20 to get in. Let’s say I want to book like a third of my position, that’s like another $20 and I want to book another third of my position. That’s another $20. So now I’m up to $60 on commissions on just one trade with the $5000 position. And then I want to go ahead and close out the final third, which is another $20.

3:53
So I spent $80 on the trade. Now, what makes that so crazy is let’s say I just made 5% on the trade. That 5% would be equal to about $250 but you throw in the $80 worth of commissions and you’ve pretty much like taking a third of your profits away.

4:09
So now you’re like at $170 which is just a little over 3%. So it’s a, it’s a big chunk and then it’s even worse when you lose money, it exasperates the trade even more. Back then it was really you’re all in and then you’re all out, but nowadays, you can get in and then you can start taking partial profits and that’s what I do.

4:27
I think it’s a great practice. And for me, I usually take my profits in 3 stages. Sometimes it’s a half position out and then I close out the other half, or maybe I take out a half in the beginning, and then I take out a quarter of my original position, which leaves me with another quarter of a position.

4:42
But overall, on average, I’m usually selling my position in thirds. So usually like with that 1st 3, I’m looking to take like 3 to 5% off, right? That doesn’t mean that I think that the stock isn’t gonna go any higher. Sometimes it’s a lot higher than I, where I take my 1st 3rd. Sometimes I’m letting those profits run throughout the course of the day.

5:00
The stock got an upgrade, it got 5% higher, and it still shows that it wants to keep running, so I’m gonna let it run. And these are not like concrete figures that I’m giving you here. You have to really judge it by what the market’s giving you on any particular day, but yeah, so for me, I take a chunk of my profits at like 3 to 5%, and then I take my next chunk of profits, somewhere around like 10 to 15%.

5:22
It doesn’t have to be at that level. Sometimes it’s like 8, sometimes it’s at 17. And then what I do with that last third is I like to let the last third just kind of run wild. This is probably where I start raising the stop loss at my slowest rate throughout the trade. But what’s cool about this, and it’s all tied to the emotions of the trade and trying to be a consistent and profitable trader, but the first part of my position that I take off the board, which is about 1/3, that sets up the second opportunity for me to take profits.

5:49
And then when I take those profits, it sets me up for the third leg of the trade. So let’s continue to think about this concept a little bit. If I close out one third of my position for a 3% profit, right? And then the stock reverses and it very well may.

6:05
And in fact, I’ve had plenty of stocks over the years that have reversed. And if it does that, well, I still made a part of my trade profitable, which actually greatly reduces the risk going forward. So if it reverses, and let’s say I get stopped out for a 3% loss on the remaining 2/3.

6:21
Well, that comes out to about a -1% loss on the trade. So it’s really not a major loss on the trade. Now, if I had got it all in and then got an all out, well, I forfeited any kind of profits on the trade and I took an overall 3% loss on the trade.

6:37
So it’s 3 times the amount of loss that I would have taken had I not taken partial profits along the way. I know the, the, the, the flip side of it is that, well, hey, Ryan. How many positions do you take profits on along the way and then like if the stock goes up 100%, you’re only doing that on a third of a position, and that’s true.

6:55
That’s true. But here’s the, here’s the kicker. If you’re trying to manage the risk and everything and the stock continues to go higher, it is very difficult to let a full position to ride that high because you start getting so much in profits that the increased likelihood of a significant pullback just like when the market runs up extremely high, it creates the possibility of a bigger pullback.

7:15
Same thing with. Individual trades, you got a full position, it’s gonna be very difficult at some point not to get stopped out because you’re trying to make sure that you don’t have a stock that’s up 20 or 30% goes back down to like 5% in profits because you’ve been riding it out for maybe a few weeks and you don’t want that to happen.

7:31
So you’re a little bit more emotionally tied to the. The need to to get out of the trade sooner than maybe what you really need to get out of it at. So getting it down to like 1/3 of a position, in my opinion, or in my experience, has made it to where, OK, I know I took 1/3 out for like a 5% profit, I took another 3 out for like a 15% profit, so I’m doing pretty good here.

7:52
This frees me up to let the profits run wild, and that’s like what I did back last year with SPCE. I took some profits along the way and ultimately, I let the rest of it run up to like 76%. I think it got up to like 99% or 100% at one point and it pulled back and I got out for a 76% profit on that final third.

8:10
Now you’re thinking to yourself, man, Ryan. You gotta pull back that much. Well, yes, because it freed me up because of how I managed to trade in the beginning to be able to let those profits run wild. The very fact that I was able to get it up to 76 was because I was able to let those positions run a little bit more wild to give it a little bit more leeway because I had already secured the bulk of that trade and profits, and there was already a stop loss to make sure that that last third didn’t run against me either.

8:37
And by the way, I provide a lot of trade setups through swingtradingthestockmarket.com. It’s my Patreon account that’s associated with this podcast. And with that, you’re gonna get multiple updates each week on my master watch lists for both bullish and bearish stocks. So whether it’s a bullish or bearish.

8:52
Market, you’re gonna have ideas for both. On top of that, you’re going to get my daily setups and the charts that go along with it and some of the more intriguing charts that I find each and every day. Not only that, but also I update all the Fang stocks once a week and I also provide updates as well with Microsoft and Tesla and Multiple updates each week on the S&P 500, Nasdaq, and Russell.

9:12
So check that out, swingtradingthestockmarket.com and by signing up, you’re also supporting this podcast. So I think we got a little bit of my strategy out of the way when it comes to partial profits. I mean, I could talk on it for days and show you examples for days, but with a podcast, you can’t really do that. Um, this is all audio, right?

9:29
So I can’t really just show you charts on how that looks, but I try to be as descriptive as possible for you guys, so you don’t need to pull up the charts to look at it. But it’s so much easier to be persuaded to take profits early on in a trade, if you’re only going all in and all out on each trade.

9:45
Because like I said, in doing so, your emotions are far greater and it’s all or nothing on every trade. So much of taking profits along the way is just as much about controlling your emotions and making sure you remain a consistent trader as it is about trying to make profits.

10:02
Why do I say that? Because so much of trading is confidence. If you lack the confidence in your trades, you’re gonna pass up on trades that you should take and you’re gonna take trades that you should not take. You’re gonna become desperate and start making trades that you shouldn’t be taking. You want to avoid that desperation feeling in your trades. You wanna just remain consistent and steady and Not have the emotions play a huge part in your game.

10:22
You just want to be looking at the charts. You don’t want to be looking at dollars in in terms of profit and loss. For me and my trading, I don’t look at any of that stuff. I’m always just looking at the charts, looking at the trade positions, using my top-down trading strategy to understand the market as a whole. And again, when you’re going all in and all out on a trade, it’s very difficult to do what this person said here and get from $20 to $40 on a trade.

10:45
Now, he did it. I’m not sure if he actually did take any profits along the way. It doesn’t sound like he did. But it’s still, it remains very difficult. Sometimes people get there because they’re not as disciplined as they should be with their trades. That’s where the whole YOLO trading comes from. A lot of people they’re just going all in and they expect these very ambitious goals and a lot of people have gotten those over the past year with the way.

11:05
The stock market has performed off of the March lows. But that won’t always be the case going forward. And as traders, are we in it for just 2020, or are we trying to be good traders for 2021, 2022, and 2023 and beyond? What I’m trying to do is be a good trader for all those years and beyond.

11:21
And when I go into a trade, I don’t have expectations for 100%. So really, we shouldn’t be, because in this email, he talks about, oh, if it goes up to 100%, it’s a good stock practice? No, I would say it’s good stock practice to be using stock losses at every phase of the trade.

11:37
You have to. Otherwise, you’re just setting yourself. for mass failure. And I think it’s a bad idea to go into a trade thinking that you’re gonna make 100% off the trade. It’s not that you shouldn’t take advantage of it when those opportunities come. But as traders, that’s not gonna happen with every trade. Sometimes you’re gonna come away with 5%, sometimes 10%, or sometimes you’re gonna lose 3 or 4% or 5%.

11:57
For me, my expectation is never to make 100% on the trade, but just to manage the trade and let the market take me where it wants to take me. And when you’ve seen what I’ve seen over the years in the stock market, you’ll start to understand why I don’t go into trades with a 100% expectations or even really, I don’t even go into trades with 30%.

12:13
Your 40% expectations. That’s, that’s kind of crazy. If you were to really be honest, yeah, I, I look at the target opportunities of where a stock can go before running into any major resistance. But for me, that’s where it ends. I’m just looking to manage the chart, manage the trade and see where it’ll take me, and I’m gonna take partial profits along the way.

12:29
In the end, it’s about a journey of many, many good trades, many, many times where you were saved because you used stop losses, because you, you manage the risk. You’re not doing that, you’re setting yourself up for disaster. I don’t care how good 2020 was for you in the stock market or 2019 or how good of a start you’re off to in here in 2021.

12:48
It takes one bad trade to wreck a portfolio, one bad trade. And if you’re playing in the penny stocks, or if you’re not even using stock losses at all, or you’re doing both, you’re playing with fire, man. So if you enjoyed this episode, I’d encourage you to subscribe, leave a five-star review on Apple if you can, if you guys have an Apple phone, always means the world to me.

13:09
Uh, and like I said, it supports the podcast and gives me the encouragement going forward too, and I wanna hear your emails, send them to ryan@shareplanner.com. I wanna hear about them. Um, if I can’t use them, I’ll, I’ll usually send you an email back saying, hey, I’m not sure if this one’s gonna work.

13:24
Send me a different question. Um, but he, I, I want your questions. I want your, uh, thoughts and, and what you’re doing with the stock market. I do read them all, so make sure to send them my way, ryan@shareplanner.com. Thank you guys and God bless.