Swing Trading Vs. Options Trading | Podcast Episode #172

0:07
Hey, I’m Ryan Mallory, and this is my Swing Trading the Stock Market podcast. I’m here to teach you how to trade in a complex, ever changing world of finance. Learn what it means to trade profitably and consistently, managing risk, avoiding the pitfalls of trading, and most importantly, to let those winners run wild.

0:25
You can succeed at the stock market, and I’m ready to show you how. Hey, everybody, this is Ryan Mallory with Swing Trading the Stock Market. And I’ve got a good episode for you guys here today, and this comes to you from France, not me, but the email itself.

0:42
So it’s always cool to kind of get some different perspectives from people overseas. I’m based here in the United States. Most of you guys know that, that have been listening to this podcast for any length of time. But here we have an individual from France, and we’re gonna give this person the name Pepe Le Pew.

0:59
Remember that Looney Tunes character? That everybody’s trying to go cancel culture on. Anyways, I thought it was a funny cartoon back in the day. I’m not giving in to the pressure. Pepe Le Pew is the name that we’re going with here and we’ll just call him Pepe for short. Pepe writes, thank you for your podcasts.

1:16
I find them very helpful. I’ve been buying and holding stocks in my RSP equivalent to your IRA I believe for many years. And for those who don’t know what an RSP is, that is a retirement savings plan. Pepe continues saying, but about a year ago, I started learning a lot about options trading.

1:34
I’ve made several trades in a margin account. I started with $10,000 went all the way up to $18,000 and now I’m back down to about $12,000. Many trades were successful in the past year, but I realized that 2020 was an exceptional year for the Bulls. I’ve had less success in 2021 with certain sectors such as technology getting a hit.

1:52
Apple, PayPal, TAN, AMD, etc. The option sometimes loses too much value before the share prices can move back up again to recoup the losses on the premium. Some errors I have made were not taking the profits when it was there before it went back down and not setting my stock losses.

2:10
Thanks to you, I’m also learning a lot about swing trading, which I find the most interesting. It seems to me that a good swing trade strategy I could trade stocks and options, is my assumption right? Or should two different strategies be used? I’m also considering not options trading and concentrating only on swing trading stocks.

2:28
Also, as I’m developing my swing trading strategy, I’m still having difficulty grasping the concept on how to screen the right stocks to invest in and what the best websites and tools to use for this screening. In addition, when swing trading, shouldn’t I be considering which sectors of the market to focus on at a given time?

2:46
If yes, what is a good resource to determine those sectors? Your help would be appreciated. Well, Pepe, I like this email. It’s pretty good. You have a lot of good questions there, and I think we can attack them all. But first, what am I drinking? I am drinking a bourbon, kind of a mixed drink.

3:01
I just made this one up on the fly. I’ve been kind of exhausted of late, so I needed a little bit of a pick me upper. You know, if you just just go bourbon, it’s gonna tire you out a little bit, especially if you’re already tired. So I got my Yeti cup out, I put some Starbucks iced coffee in there, blonde roast, put some half and half and two packets of splenda.

3:20
But here’s the kicker to try to stay true to form and make this about bourbon. I poured a little buffalo Trace in there. And Buffalo Trace is pretty good. It’s one of the better bourbons that you can still get on the cheap. And Starbucks blonde roast by itself, really good, man. I mean, you can feel that stuff flowing through your veins when you start drinking it.

3:38
But together, it’s just a 5 out of 10. It’s not that great. And it’s not even a bourbon by itself, but since I put some buffalo trays, I’m gonna give it a score, I give it a 5.0. Now, let’s dissect this email. Pepe’s learning a lot about options trading, put in some capital work.

3:55
Starts with $10,000 pushes it all the way up to $18,000 now back to $12,000. So, goes up about 80% in the account, pulls back 33%, but that 33% takes those $8000 worth of profits and only makes them $2000 in profits.

4:13
Remember, when you pull back after increasing your portfolio dramatically, it doesn’t take as big of a percentage to lose most of your gains. In this person’s case, they go from $10,000 to $18,000 80% increase.

4:28
Let’s say after that 80% increase, it had a 50% pullback. Guess what? This person’s now down $1000 in the account. Now that’s not what’s going on here, but I’m just trying to give you an example, how quickly you can lose profits, and I don’t think a lot of people realize that the market, it takes the stairs up and it takes the elevator down.

4:46
And if you’re not paying close attention, it doesn’t take long to lose those profits. And most people struggle not with making profits in the market, it’s trying to sustain those profits, trying to keep the majority of them. In this case, 75% of the profits are gone.

5:03
And Pepe’s right. The 2020 trading year gave a lot of people a false sense of security. If you started trading after the March bottom, all you saw was up, up and up, particularly as it pertained to tech stocks, Fang stocks. You thought the world of trading. It was easy.

5:19
I can’t tell you how many emails that I got during that time saying, quitting my job. I’m going into a full-time trading. And people were leaving good jobs. And I would say for the large majority of them, it didn’t work out well because they were just basing it off of one moment in time in the stock market. They weren’t really trading a down market.

5:35
They weren’t trading a sideways market like what we’ve seen over the last 2 to 3 months. Last 2 to 3 months, this market’s a hard market to trade. And so Pepe here is starting to realize that traded heavily on the tech stocks and now Pepe’s not getting anything out of them. And that’s why it is so important not to be glued to just one sector specifically.

5:54
You can’t be like, hey, I like tech stocks. I’m only gonna trade tech stocks. A lot of people do that. And let me tell you, it’s easy to fall into that groove. I had to consciously say, I’m not going to let that happen to me in 2021 because I knew that I had traded so heavily tech stocks in 2020 that it would be very hard to break that addiction to the tech stocks.

6:13
And what do you get? You get a lot of tech stocks right now selling off. Tech stocks are trying to sell off for a 5th straight week here, but you also have other sectors that are doing actually pretty good. Energy, industrials, financials, materials, commodities, they’re doing good, but if you were just in tech stocks, you’re probably down 30 or 40% in your portfolio right now.

6:34
So you can’t get glued to it. I’ve had to trade more energy stocks this year than I would care to trade. I don’t really like trading energy stocks, but it’s not about what I feel. It’s about what the market’s trying to show me and tell me what I needed to do. And for the most part, energy has been one of the better sectors year to trade, or at least over the last few months it has.

6:53
And if I held on to this idea that, OK, in 2020, it stunk trading energy. I hardly traded it at all in 2020. And even the year before that, I didn’t trade it that much. But if I hold on to those beliefs in the 2021, energy starts taking off and I’m just gonna be stubborn in my ways and not trade it.

7:09
No, I can’t do that. I still don’t like trading energy because I think it can be so flaky at times. But then you might say, well, Ryan, you don’t trade biotechs. Why don’t you trade biotechs? Well, I’ll trade the ETF biotechs, and that’s good enough for me, but I don’t trade like the small cap, midcap biotech stocks, and even most large cap biotech trades, I won’t take.

7:27
And the reason for that is because there’s so much headline risk. There’s these FDA approvals that you have to be very intimate with the news and the developments of each of these biotech plays in order to swing trade them, and I don’t want to dedicate that much time to it. There’s far too many other stocks and sectors and industries that you can capitalize on without having to be intimately familiar with the biotech sector in order to avoid that headline risk.

7:49
Pepe also talks about how the options trading has been very difficult too, where she gets way up in the premium, but then she loses it and doesn’t take profits. Now, one thing I would say about profit taking, and I take profits along the way, and why do I think it’s a good strategy for everybody is because one, we’re in for free commission environment.

8:06
So if you’re trading 3 shares of AMD and it goes up 10%, take a third off. If it goes up 20%, take another 13 off. If it goes up on the last lot, 30%, let it keep riding, see how high it goes. Maybe it’ll go up 50% or 60%. I’m just throwing numbers out there. There’s no meaning behind them, nor do I think AMD is gonna go and make those kinds of moves.

8:24
I’m just making it simple for you in this example. You just let that last 3 ride. I think that taking profits along the way usually tends to fall in like 3 different categories. You take them in 3s, you can take them in halves, or you can take them in quarters. Sometimes I’ll take 3 off the table and then I was like, you know what, I don’t want to be 2/3 in on this trade still.

8:44
I’m gonna shave a little bit more off. It’s like 1/6 of the original position and I’ll get it down to a half position. I did that with Facebook this week. At first, I took a 3rd off, then I realized, you know what, tech hasn’t been that reliable. So the next trading day, I took a 16th off and just took it right down to a 1/2 position.

9:00
So a lot of it comes down to the market environment that you’re in and your preference for risk and how much you feel comfortable taking off the table as the stock increases in value. So many times, and I’ve even had it happen this week. I will be up on a trade. I’ll take 3 off the position and I don’t even like doing it.

9:19
I hate it. I feel like I’m leaving money on the table and so many times that stock will reverse, especially over the last 3 months because the market has been very choppy and sideways. The market will reverse and it’ll take me out of that last 2/3 or half position. And I’m like, man, I’m glad I really took some off the table there because it actually made the trade a winning trade instead of an overall loser.

9:39
So taking profits along the way, it’s not because that you don’t have faith in the stock that it’s gonna keep going up. It’s basically protecting yourself from like what’s happening with Pepe here, where Pepe’s trading options, the options reverse and Pepe loses all the premium. And let me also take a quick moment to tell you about swingtradingthestockmarket.com.

9:57
It goes along with Swing Trade in the Stock market podcast. It gives you all my market research each and every week. You’re going to get updates on the S&P 500, the Nasdaq 100, and the Russell 2000 plus my own indicators, as well as updates on all the Fang stocks, my bullish embarrassed watch lists and daily trade setups and charts each and every day.

10:16
So check that out, swingtradingthestockmarket.com. Moving along on this email, asks about whether it’s a good idea to trade stocks in options. And is that a good trading strategy? Well, I, I think every person’s trading strategy has to be unique to them. You have to be able to build your strategy around your personality.

10:33
I get a lot of times people are saying, hey, how much do you trade? What position size do you trade? And I don’t like to tell them that because just because I trade a certain amount on a trade doesn’t mean that that amount’s gonna be what you need to trade. For some people, trading 15 or 20% might be OK because their risk tolerance is a little bit greater and their accounts might be a little bit smaller versus the person trading $10 million may not want to put 20% of their value on a single trade.

11:01
So a lot of times it comes down to the size of the accounts as well as one’s personal preference for risk. So me telling you what I trade is not relevant to you. Because it’s not going to help you out by trying to mimic exactly what I’m doing when it comes to managing the risk. Risk management is a very personal thing, and it’s something that you’re trying to do to protect yourself from capitulating and keeping those emotions from sneaking into your trading decisions.

11:24
And here’s the other thing I would say, I don’t think that it’s good for traders starting out to even consider trading options. There is so much more that can go wrong for you on options. I know there’s a lot of attraction to it because for a small amount of money, you can control the fate of a lot of shares. But there’s a lot of variables that go into it and it’s very easy to lose that money that you put into those option trades very, very quickly, especially if you’re playing an options contract that’s expiring weeks or a month out.

11:53
You will lose that premium very quickly if it doesn’t go immediately your way and you have time parameters, you have all sorts of other variables, that’s what they call the Greeks, that if you’re not right on them, you might be paying too much premium. You might not be given the position a long enough time to work its way towards profitability, and before you know it, you’ve lost everything that you put into that option.

12:14
So I don’t like options trading for new traders or even slightly experienced traders. I don’t trade options at all. I don’t have any desire to because the risk can be managed so much better when you’re just trading stocks. So I don’t think it’s a bad idea where Pepe says, I’m also considering not options trading and concentrating only on swing trading stocks. I think that’s a great idea.

12:31
Now for the final segment of Pepe’s email, says, I’m still having difficulty grasping the concept on how to screen the right stocks to invest in. What are the best websites and tools to use this for screening? There’s a lot of different websites people use. People use like Finvis. I use TC 2000. I love TC 2000. Now it’s a uh there’s a cost behind it that that you pay for each month. I think it’s well worth it. I love it. I’ve been using it probably for like 15 years now.

13:05
But also, you got to remember too, when it comes to screening stocks, you’re also trying to screen out the stocks that you don’t want to even consider trading for me. That’s like stocks under $10. It’s like biotech stocks, the stocks with like a beta less than the S&P $500 which would be one. I really don’t want anything that’s less than that because that doesn’t even really make sense for me to trade anything less than one because I might as well just trade the S&P 500 if that’s the case.

13:23
And yes, you should be considering the sectors of the market and we talked a little bit about that earlier in this episode here and that you want to make sure that you’re not getting hooked on a specific sector, that you’re not saying, OK, discretionary and tech, that’s all I’m going to trade. No, you’ve got to expand it. You gotta be willing to trade industrials and financials. I don’t always enjoy trading financials, and I don’t always enjoy trading energy like I said before.

13:42
But I do them because it’s necessary to trade those because sometimes those are the sectors that are moving and while I wish I could just trade technology and benefit from doing so, I also know that those sectors are going to have times where they fall out of favor and I, I’m not just going to blindly follow them to the downside.

14:08
And so for the sectors, you can follow the ETFs or like with TC 2000, they have a whole watch list dedicated to following sectors and another one following all the industries that are moving. So when you find the right sector, you can drill down and find those industries within that sector that are also moving.

14:24
And with the watchlist, I’ve also put together a course. It’s a pretty good course that you can purchase and it will give you all of my tricks to trade for managing a watchlist and how that leads into your daily trade setups each and every day. So check that out. I have a link to that course in the notes of this podcast.

14:41
All right, I hope you enjoyed this episode. Make sure to keep sending me your emails, ryan@shareplanner.com. I thrive off of those emails. I try to get to as many of them as possible, and I think I do most of them. Sometimes there’s just some emails that you might send me that really aren’t something I can base a podcast off of, but by and large, if it’s a good email, it’s likely to find its way onto this podcast.

15:03
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15:21
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15:37
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15:54
If you have any questions, please feel free to email me at ryan@shareplanner.com. All the best to you and I look forward to trading with you soon.