Using Massive Stop-Losses | Podcast Episode #150

0:00
Hey, everybody, this is Ryan Mallory with Swing Trading the Stock Market. And today’s episode, we’re gonna be talking about using massive stop losses. Now, typically when I’m trying to manage the risk and when I’m identifying places to put my stop losses, I don’t use massive stop losses.

0:15
Massive stop losses requires massive, even more massive rewards. And I don’t wanna have to be obligated to seek out these massive reward potential opportunities. So we’re gonna talk about that today. Today’s email comes from an OG member of SharePlanner.

0:31
This guy goes back about 8 years to when I was doing the trading block, but it wasn’t actually called the trading block then. It was called the splash zone. So he was a member way back when and he’s reaching out to me in this episode. We’re gonna call him Jim Bob. He starts off, he says, hey, I’m an old school SharePlanner splash zone member.

0:49
That’s, of course, the trading block today. He says a few years ago, I sold my business and began swing trading. In one month I made way more money than I ever had. Or just following your advice. Then the next month I gave about half of that back, still ended up way, way up, but I realized I didn’t have the emotional control to handle the swings of swing trading.

1:07
And that’s the thing. You could come up with great stock picks, you can come up with some great technical analysis, but if the emotions are not in check, you’re using too big of a position size, it doesn’t even matter because those will ultimately trump whatever analysis that you have. I mean, think about the relationships that you see around you, people who are married, parents, friends, and you hear about some.

1:27
Of the things that goes on in these relationships. And it’s like, man, what were they thinking? Well, I could tell you, they were probably thinking one thing, but the emotions are so much stronger, that emotions tend to overrule whatever’s rational and whatever is logical. So being able to keep your emotions in check and trading is very important.

1:43
Now, my bourbon for today. This is kind of a unique one cause somebody a long time ago, and I don’t remember who it was, I think it might have been a member of the trading block, told me to try out this horse soldier. And I did. I got some the other day. It’s about a $50 bottle. I think the retail price is like 45 or so, but it’s kind of interesting because it’s created by Green Berets who answered America’s call just days after 9/11 and was inserted into Northern Africa on horseback.

2:09
And these people were called horse soldiers. So they make this stuff. And it’s 43.5% alcohol, 87% proof, and the bottle is awesome. I mean, it’s got like this copper plating on the outside of a horse soldier. It’s really cool. So it’s Horse Soldier Premium, straight bourbon whiskey. Now when I taste it, it’s not like a strong flavor.

2:27
I thought it was gonna be a pretty bold, bold flavor, but it’s actually pretty sweet. It’s very sweet. You can taste a little bit of that nice caramel flavor, and then you taste a little bit of heat, but it’s not too much. And honestly, I would say it’s a really good bourbon for folks who don’t like bourbon. If you’re trying to get somebody to like bourbon, introduce them to this drink because it’s not overly strong, it’s not overbearing, and it has a nice little subtle sweetness to it.

2:50
So check that one out. It’s, it’s pretty good. Overall, I would give it a 7-8 on a scale of 0 to 10. And a 7-8’s a good score, but I’ll. I like the proofs a little bit higher. I like those proofs around to like 100 proof. This one comes in at 87. So I think if the proof was a little bit higher, and that’s fine, even if it has a little bit more heat to it, I would have probably given it a higher grade, but 7.8.

3:09
Now, on to this email here. In the first paragraph of his email, like I already just started talking about, he gave up all of his gains after having one of the most incredible months of trading in his life. And I talked about this with people today. I said, look, your success in the stock market is not going to be based off of how good of a stock picker you are and how well your winning trades are.

3:30
Where the rubber really meets the road is how you manage the losing trades. Because those losing trades, when you start getting into a market downturn and you have like 3 or 4 days of losses, kind of like what’s been seen this past week in the market, how you manage those trades and your patience with getting into new trades is going to go a long ways in determining how successful you are on the year.

3:50
That’s why so many people, they make a lot of profits and they start dog piling in at the end of a big market rally. And then when that sell-off comes, all those fresh and new positions that they added just start bleeding, and they’re taking major losses. And along the way, they keep adding new positions at times when they really should just be patient and let things settle down.

4:11
So yes, we all want to be profitable in the stock market and I think most people do experience periods of being profitable, but what gets them is when things are not as profitable and we give up all the profits that we made when the time was a little bit more easygoing. You got to preserve those profits. Sometimes you’ll take 2 steps forward and 1.5 steps back, but in the meantime, you are adding profits nonetheless.

4:32
What you want to avoid is taking 2 steps forward and 5 steps backwards and that’s what most people find themselves in during a market pullback. That’s where people start doubling down and tripling down and getting into more revenge trading where they get stopped out of a trade and they get right back into it or they ignore their stop losses altogether.

4:49
Stop losses are not fun. I got stopped out of a trade today for a profit, but I got stopped out of a trade the other day, but I got stopped out of a trade the day before for a loss. In both cases, I don’t enjoy it. I want to stay in my positions as long as I can and make profits off of them. But the one thing I can’t do is ignore my stocks.

5:06
He says these last 8 years, I have been quietly following your advice from afar but taking a much more passive approach to investing. But recently, as a result of my son now being excited by trading and business fundamentals, I have been getting more involved in my investments in your podcast has been integral part of my learning process.

5:21
Thanks for all that you do, my. Question is inspired from your recent episode, stop losses and partial profits. I have traditionally applied a 25% trailing stop loss on the 52 week high to protect myself from unacceptable losses and protect profits on stocks that have performed particularly well.

5:38
But some of my holdings are more volatile than others, and I miss out on some really great gains because of a 25% trailing stop that is frankly, too tight. For say a pharmaceutical company looking for FDA approval or a SPAC awaiting a merger. Conversely, there are some stocks that barely move that a 25% trailing stop loss feels way too loose for.

6:00
Like a shipping company or a large fuel manufacturing company, so don’t call me Goldilocks. Well, I call Jim Bob, but trust me, I was tempted to call you Goldilock. Looking for a logical methodology perhaps based on past volatility to apply a bespoke trailing stop on each holding. Is there a methodology you could recommend to those of us holding stocks longer than you swing traders are best regards and much respect.

6:21
Jim Bob, AKA Goldilocks. Now, the first thing I’m gonna say is that 25% stop losses, those are steep. If you’re looking for a 2 to 1 return, you need to be getting 50% or at least be able to project how it could get 50% return using a 25% stop loss. That’s pretty significant.

6:38
Now, the other thing I would say about a 25% stop loss for a long-term trader is that most. Stocks will have moments either during the course of a year or a couple of years where it pulls back 25%. So if you’re looking for like a long-term trade where you’re going like multiple years out, 25%’s gonna probably stop you out at some point.

6:59
I mean, you look at 2018 with the quarter 4 sell-off, that was a pretty steep sell-off. That was like an excess of 30% from October to December. Then, you had what just happened in March, and that was what, 15 months later, you had a massive pullback of similar size.

7:17
So what I hate really doing is using a stop loss of 25% off of the 52 week highs and it’s just a trailing stop loss and then you get knocked out. What I often do with long-term investments, for one, when it comes to managing the risk, I want to draw the line in the sand. Where does this stock have to go?

7:34
And long-term investments, I’m going to use a wider stop loss. That’s me. It’s not for everybody, but if it’s gonna be long. I feel like I need to give it a little bit more wiggle room. So I draw the line in the sand. Maybe it’s like a long-term trend line going back 10–15 years to where it has consistently held that trend line and if it breaks that trend line, maybe on the weekly or on the monthly chart, then that’s my clue that I need to probably get out of the trade.

7:59
Now, entry prices are really important. Now, this is like kind of where Warren Buffett has been often quoted saying, being greedy when others are fearful and being fearful when others are greedy. And so right now in the stock market, by his own reasoning, he’s probably more fearful.

8:16
But when you get into moments like March of 2020, he’s a little bit more greedy. And so, for long-term investing, I don’t really think that you should be doing a ton of buying all the time. Why is that? It’s because the market doesn’t always provide a lot of great opportunities when it comes to buying stocks for the long term.

8:36
You really got to wait for major, major shakeouts. That’s where you’re going to get your best entries possible. And one of the tools that I use is the T2108. I think it’s a great measurement tool. It’s through TC 2000. You can find a link to it in the notes of this podcast, but essentially it measures the percentage of stocks trading above their 40 day moving average.

8:54
And when you start getting down on like single digits, that’s usually when you are getting into some major, major oversold conditions. And those oversold conditions that the indicator starts printing often leads to some incredible in the market. So it’s kind of like having a grocery list or a wish list of stocks that you really want to get into following a major pullback.

9:14
When you finally get that major pullback, that’s when you start buying. Last time to really buy a long-term stock was the March 2020 lows. Time before that was the December 2018 lows. But you got to be patient for it.

9:30
We’ll get them again. History is riddled with pullbacks. And of late, they’ve been pretty short. 2020 pullback lasted about a month. The 2018 one lasted about three months. But if you’re looking for long-term opportunities, those are the times to be trying to get long. Trading SQ when it’s trading almost at $300 a share, probably not the best time to be getting long and creating a long-term position in it.

9:51
But go back to March of 2020 when it was trading at around $30 a share. Yeah, that was a pretty good time. So the are going to be very key, and it’s also gonna be stocks that you really believe in the long-term story on. For instance, like the cannabis stocks spent most of 2020 at its lows.

10:08
It wasn’t until November, December of last year where they actually started picking up a little bit of steam. Plenty of opportunity to build a long-term position in it. And you have to believe in the story too. You have to believe, hey, I actually think that cannabis stocks will probably do good under a Biden administration. That’s a valid reason.

10:24
If you like MJ or Tilray, Tilray is gonna be a lot more volatile. CGC will probably be a little bit less volatile. MJ is probably gonna be the least. There’s gonna be volatility, and I mean just look at what it’s done over the last month or two. It’s been volatile. But what I’m trying to get at here is trying to buy these things when they have experienced significant pullbacks and they’re starting to bounce finally.

10:45
That’s when you want to start getting along. You don’t want to get into cannabis here in the past week when almost all the cannabis stocks were pumping out new all-time highs on a daily basis because then it’s very easy for it to give you that 25% pullback. So if you’re going to use the 25% pullback, you really need to make sure that when you’re getting long, it’s at some incredible moments of opportunity in the stock market.

11:07
You can’t be doing it at all-time highs. You’re going to probably get stopped out at that point for a loss. But again, with any of your long-term positions, I really think instead of just doing a stock stop loss, which I’m never going to be a fan of, it’s better to just, even if you’re just checking up on it every once in a while and you can’t pay attention to it every day, it’s better to have a line in the sand of knowing, OK, if it drops below this level, this is where I’m gonna get out.

11:23
Cause you gotta remember, long-term trading too, you’re playing with earnings, right? So if you’re playing with like something like SQ yeah, it could have an easy 25% sell-off as a result of poor earnings.

11:39
Apple, much less so. But we’ve seen stocks like Facebook that’s had horrible earnings and it has sold off in a major, major way. In the last couple full years. And he makes a good point here. If you start trading these pharma stocks and SPACs for long-term trades, they’re very difficult to not be stopped out quite quickly.

11:55
I don’t think either of those are really a good approach for the long term. I mean, unless you’re trying to get in like Pfizer or Gilead or something like that, something that’s really, really big and it’s providing a quote unquote generational opportunity to be able to get long on the stock. OK, then maybe, maybe, maybe.

12:12
OK. I don’t want to, I hate, I’m not a big fan of biotech stocks anyways because I do think that they’re very difficult to manage the risk on even from a swing trading standpoint, even on a day trading standpoint, because you have these FDA decisions and you just have volatile earnings reports, just a lot of headline risk on them. OK? But if you start trying to put a 25% stop loss on Walmart, you could be sitting there for years and it doesn’t do anything and it still doesn’t trigger your stop loss.

12:35
And let me tell you guys real quick about swingtradingthestockmarket.com. It’s a really good companion to this podcast that’s going to give you all of my analysis on my bullish watch lists. These are my master watch lists that I trade off of that includes my bullish and bearish watch list. I update them twice a week for you.

12:51
And I’m also gonna give you my daily setups off of those watchlists each and every day. Tell you which stocks I’m looking at possibly trading. Furthermore, you’re going to get the most intriguing charts that I come across each and every day and updates on all the Fang stocks plus Tesla, plus Microsoft and multiple updates each week on the S&P 500, the Nasdaq, and the Russell 2000.

13:11
So make sure to check that out, swingtradingthestockmarket.com. Now, when it comes to these long-term investments, I’m usually looking at your mega caps. If the market’s going to bounce, what has to bounce in order for this market to really come back? In 2020, it was Apple, it was Amazon, it was Google, it was Microsoft, Tesla, Caterpillar, Walmart, and all these stocks were providing incredible trading opportunities at one point or another.

13:39
You go back to 2008, it’s pretty much the same ones. Back to 2018, providing incredible opportunities for the long term. Nvidia, go back to 2008, different companies possibly, but same story. There had to be stocks that had to go up in order for the market to recover.

13:55
Same thing with 2000. Those are the stocks that you really want to be identifying for the long term. What stocks have to go back up in order for this market rally to sustain itself? Of course, you can’t have really a major sustained rally without Apple. And so when you’re looking at a lot of these opportunities from a long-term perspective, use the weekly chart, it’ll take a lot of the daily noise out.

14:15
Not overly crazy about the monthly, unless it is just a massive, massive opportunity like 2008, 2000, that kind of opportunity to create some new long-term investments. Now, I hate saying this, but stocks only go up long term, they only go up. Granted, you have plenty of pullbacks in between.

14:32
You go back to the very beginning of the stock market, the history of the stock market always going up. If it didn’t, why would we even trade it? Why would we invest in it? So long term it goes up, but you need to wait for those opportunities where there’s a blip in the matrix to get long. And it needs to be stocks one, that you have a belief in the long-term sustainability of the company, and two, the market needs it in order to recover and go back up.

14:56
Where would this market be if Apple, Amazon, Google, and Microsoft did not go back up? Be a totally different story. We’d probably still be selling off if those things never came back. And so when you get these massive pullbacks, you need to decide for yourself what are some of the stocks that you would like to buy?

15:12
Know it ahead of time, because this is gonna be like your laundry list. And at what prices? For me, I can tell you, if we get another major, major pullback, Apple would be at the top of my list. So would Nvidia, so would Caterpillar, Google, Tesla, SQ would be on there. I mean, that’s, that’s a great company.

15:31
So you gotta know those companies ahead of time, so when they actually do pull back, you’re not thinking in a moment of emotion, what should I buy? What should I buy? No, you’ve been planning for this. Because, I know SPACs and biotechs, they’re popular and a lot of people like trading them. But they’re very difficult long-term plays, especially the small cap pharmas, and the SPACs in general, I would just avoid all long term because that’s kind of like one of those things where when we talk about this bubble bursting one day, we’re gonna be talking about SPACs.

15:50
But to the question of Jim Bob, where he’s saying, hey, what do I do if, you know, what’s, what’s a good methodology? What I would try to tell you is one, the entry price and the opportunities that you’re seeking out for the long term needs to come when the market’s providing you some great opportunity. You don’t want to be looking at it right now, it’s like, oh man, I missed out on a huge rally off of the March lows.

16:07
Maybe now I should start creating some long-term investments. That, that I could, I could never get behind. I would have to wait for another major market pullback and it doesn’t necessarily mean it has to go back to the same level it was before. Historically, that doesn’t happen. But you may have a pullback somewhere in between the current price now and to the lows that we were at back in March, that would be a higher low.

16:26
And once that’s achieved, that’s where I’d want to get longer. And then if you want to use a 25% stop loss from there, I wouldn’t be putting it off of the 52 week highs because you may be like 50% below the 52 week highs or 40% off the 52 week highs. That doesn’t make a lot of sense.

16:42
But what I would do if I was still insisting on that 25% stop loss is base it off of where I got in at and at least then if the market pulled back 30 or 40% or this particular stock has pulled back 30 or 40%, it’s gonna have to pull back another 25% in order for you to be stopped out at.

16:58
So it’s a little bit harder of a task, not impossible, but it’s a little bit harder. And if you’re jumping into stocks that are going to have to be on the forefront of the recovery, you increase your chances of not getting that 25% stop loss triggered. And the reward potential is far greater. You’re buying more shares because the share price is lower.

17:15
So keep that all in mind. If you have any questions, feel free to email me, ryan@shareplanner.com and I’ll try to put that on air and try to answer it and make sure whatever platform that you’re listening to me on, if you can, please leave a 5-star review. It means a lot to me. It means a lot to the efforts that go on.

17:34
Behind the scenes to get this podcast out to you each and every week. I really appreciate those reviews. Thank you guys and God bless.