Preventing Gap Downs | Podcast Episode #180

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 today’s episodes are gonna be a good one. We have a question about ETF expenses and After hours trading, how to avoid those gap downs that can be quite pesky to the swing trader.

0:50
For the redneck name, I’m going with Hillsborough. It’s a county here in Florida on the over on the West Coast near Tampa in honor of the Tampa Bay Lightning winning their 2nd consecutive Stanley Cup trophy. And for today’s whiskey, we’re going with Heaven Hill. It’s bottled and bond.

1:06
It’s 100 proof, 50% alcohol, which is the minimum. Requirement for a bottled and bond bourbon, bottled and bom bourbons, as you may know, has to be aged for at least 4 years. And I always liked these bottled and bonds because there’s a strict regulations from the bottled and Bond Act of 1897 that they have to follow.

1:24
And so you always know that you’re going to get a pretty good product with a bottled and bond bourbon. Kentucky Straight whiskey, it’s 7 years old, which is a pretty long time for most bourbons these days. Any case, the color. it, it’s pretty good, man. It’s like this nice amber brown.

1:40
It’s got this really nice rich color to it. On the smell front, you have a nice like oak flavor mixed with a little bit of honey. And then you have the taste. The taste is pretty interesting. It starts off with this like subtle spice and it just gradually increases as you drink it.

1:56
So it’s, it’s just a very nice flavor to it and it, and as it increases in its spiciness, it also has this like underlying sweet. This too, you pick up on a lot of different flavors. I don’t even know what the flavors are, but you definitely know that they’re there. It’s a good sipper.

2:11
I always like to, to tell you whether or not this is a bourbon that I would classify as a good sipper or not. Good sipper means like throughout the week, it’s worth drinking or having it on hand to pour one after a long day of work or trading or whatever it might be for you. Heaven’s Hill, I give it a 7.8.

2:28
It’s a solid bourbon, good sipper. Nice finish to it. 7.8. Now back to Hillsborough’s email. He says, hi Ryan, I have a question about ETS and expenses that go with them. I am from Canada and there are not many commission free trading platforms available.

2:43
There is one or two, but there is a catch that goes with them. Whether that be poor service or a lack of not being able to use stop losses. I trade with a bank that charges $10 for trade, $10 to buy, and $10 to sell. While that is expensive, I’m still managing. And profit a couple of dollars per trade. However, there is a commission-free trading on some ETFs offered from my bank.

3:03
Now, they say commission-free, but they still charge a MER fee. Now, if you don’t know what MER fee is, that’s a managed expense ratio. It’s pretty common with most ETFs, for instance, like SPY SPY, the S&P 500 ETF, they’ll charge like 0.09%, I believe. And so you can have them, you know, ranging from anywhere from like 0.05 all the way up to like 1% a year.

3:24
Now, swing traders, is it a big deal? Not so much because most of the time you’re swing trading a stock for 2 to 3 weeks, so it doesn’t really cut into the profits too much. Those borough goes on to say I’m unclear on how that affects me and how that cuts into my profits or if it’s even worth trading ETFs. I forgot to mention I’m trading with a small account of $600 of which I only put about half into a position.

3:44
My other question is, how do you protect yourself from after hours trading? This question goes back to a CCIV trade I did. And by the way, folks, I’m getting tons of questions about CCIV. 4th of July, I go out on the boat with some friends. We’re out at the sandbar. I got people I don’t even know. Apparently they listen to the podcast. They’re coming up to me.

4:00
They’re asking me about CCIV. He says, I kept moving up my stop loss on the CCIV trade as the stock went up. I could have sold at double my money, but I was waiting for it to bottom out on my high stop loss. Instead, overnight shares dropped from 60-ish to $30.

4:17
I got out at the same price I got in at, but I’m wondering how to prevent such a thing from happening again. Hope you get this email, stay safe and thanks for the podcast, 5 star review. Thank you very much, Hillsborough. Now, lots to go over here. First of all, I don’t get too worked up unless in Canada, they have a lot higher management expense ratios that they’re charging you for on your trades.

4:37
If it’s like 0.01% or 0.05 or 0.5%. If you’re swing trading, it’s not gonna cut into your profits too much because that’s usually an expense ratio that goes over the course if you were to hold it for an entire year. In this case, if you’re swing trading for 2 or 3 weeks at a time, it doesn’t really matter.

4:53
All of your ETFs are usually going to have them. That’s why they offer them because they want to make that money off of that managed expense ratio without cutting too much into your profits and making it in an unattractive play. Now Canada is actually a pretty interesting country in terms of how they handle the commission free trade. There’s not a lot of websites out there that do it.

5:10
I would try to say check out some of the ones here in the United States that might offer you the opportunity as a Canadian to trade. I’m not sure which ones those are, but I would obviously I would check out like some of the major brokerages here in the United States and see if they have anything they can offer to Canadians.

5:26
And if they do, there’s a good chance that they’re gonna offer you that commission free trading as well. Again, not positive on that. I haven’t explored that too much, but I would say check that out nonetheless, that would be my approach to it at least. But now I really want to get into the after hours trading because that’s really the meat and potatoes of this podcast episode.

5:43
After hours trading can be a real nemesis. Swing traders. The reason why is swing traders, unlike day traders, hold their positions overnight. Day traders are gonna close it out before the closing bell, right? Swing traders take on the risk of overnight trading for the hopes that they can profit even more from an extended rally, but there’s that potential for there to be a downgrade, for there to be bad news.

6:05
That causes the stock to gap down. For instance, like biotech stocks. I’m not trading biotech stocks on an individual name basis because the potential for there to be a FDA decision that comes out or for some kind of like penalty or investigation that comes out to just completely sabotage a biotech stock runs high.

6:24
And so when I trade biotechs, I’m usually going with the. ETFs like an IBB. Now, should you even trade after hours? Well, most of the time after hours trading is very difficult. For one, the volume is extremely light. And when there’s very light volume, that means it’s gonna be very difficult for you to get a fill on your shares.

6:41
Now, stocks like Apple or Amazon, that might be a little bit different, but for most stocks, it’s very difficult to get a good fill. Also, the bit. The ask price, there’s gonna be this huge spread. Now for those who don’t know what that means, you have the bid and then you have the ask. The bid is the highest price that somebody’s willing to buy a stock at.

6:57
The ask is the lowest price that somebody’s willing to sell it at. So when you have a big spread, that’s going to mean you’re going to get a bad fill on your trade. You want the bid and the ask to be as close as possible, like 1 or 2 cents off on most of your stocks. Now the times where after hours trading could be very profitable is like when there’s a big news event or when there is earnings events.

7:19
That’s going to create a lot of volume, that’s going to create a lot of activity in the stock, so it’s gonna be much easier to get a good fill. But this guy, he gets in the CCIV and he really loses his height on it because it’s not so much that he lost a lot of his capital because he got out at the same price that he got in at, but man, the guy was up double his money.

7:36
He was up double his money and he still got out at the price that he got in at, and that’s a shame. So one of the things I tell people to do is like when you’re trading. These kinds of stocks when they go on these epic rallies and CCIV went from like $10 in January to $75 plus in February.

7:52
When you start seeing these astronomical rises, guys, don’t start thinking to yourself, oh, it’s gonna go to 100 or $200 or $300. I’m gonna get rich. That’s your first problem right there on the trade is starting to think that it’s going to be astronomical heights beyond where it’s already at the fact that it got to. $75 consider yourself lucky.

8:09
Don’t consider yourself a good trader. A lot of people wanna consider themselves a great trader because all of a sudden they’re sitting on all these profits, but you haven’t booked any of those profits yet, so you don’t have squat. And when you don’t have squat, you don’t have anything to brag on because you could have a gap down out of nowhere. And that’s exactly what happened.

8:24
This thing gap from the 60s all the way down into the 30s again, and in this case, Hillsborough lost all of its profits overnight. So what do you do? How do you prevent this kind of stuff? For one, you don’t go chasing stocks. There’s new egg this week, NEGG. I did a few posts on stocks and Twitter about it.

8:42
I said, guys, you don’t start chasing new egg at $60 or $70 a share when it was just trading at $10 a few days prior. You have to anticipate breakouts. You have to get in at the breakout. You don’t get into it after the breakout. Extremely obvious and it’s 200-300% above that breakout level.

9:00
No, you gotta anticipate it. That’s where the money is made. That’s where the risk can be contained the most. And when you get into this big breakout, let’s say you do find yourself fortunate enough to get in at $10 and it rises up to $30.40 dollars and $50 you have to start scaling out. You have to book some profits.

9:17
You don’t have to book all of your profits. You can let some of it run as much as possible. Who knows how high it’ll run, but you start getting into like 50-600% profits. You’re absolutely crazy if you’re not booking profits on that kind of stuff. So in the case of Newegg, people are thinking, well, this is such a great business. I’ve, I’ve known about this thing since I was a kid.

9:33
The market doesn’t care about what you’ve known since you were a kid. I’ve known about new egg too. I’ve built computers through Newegg. I started my business off of a computer that I bought through New Egg. And built through them, but I’m not gonna get married to them just like I own a Tesla doesn’t mean I’m going to get married to the stock just because I understand it or I know about it or I like the CEO or whatever.

9:54
No, these things are prone to corrections, they’re prone to pullbacks, they’re prone to. Gap down and if you don’t accept that when it comes to swing trading and when you have a big profit, if you’re not starting to take profits off the table to ensure that you walk away with some kind of a profit ultimately you’re gonna be a loser.

10:10
Here’s the thing I don’t enjoy taking profits. I hate it. I get up on a trade, I’m up 5 or 10% on the trade. The last thing I wanna do is take any profits off the table. It’s human nature not to want to take any profits off the table. Why? Because I think it can go higher. I’m pretty excited about this trade.

10:26
I feel like I’m on a good runner just like where I was with Twitter over the past month. But guess what? Times do change just like today. 56 points down at the open, I’m stopped out of Twitter for about a 15% gain. On my last third of a position, but I’m glad that I took profits along the way because I didn’t know how long or how far that Twitter trade would run for me.

10:46
I hate taking profits, but from a discipline standpoint, it’s absolutely critical to my trading. And I don’t find myself getting beat up by these massive gap downs, knock on wood. I hope I never have to experience something that goes from like $60 down to $30 overnight. But one of the reasons why I don’t is because I’m not chasing these things at astronomical heights.

11:06
When you start chasing these stocks that are up 2 or 300%, yes, you are opening yourself up to a huge gap down. So when you’re in CCIV and Even if you get in at a good price like $30 and it goes all the way up to 60 to $75 expect that at some point in the future there is going to be a gap down.

11:22
I would say with about a 95% certainty, you’re going to probably see a gap down on a stock that’s run 3 or 400%. In the case of Newegg, you just had that. It closed at 67 the day before. It opens up at 53 today and it keeps on dropping. You want to avoid those gap downs as much as you can.

11:41
And so when you’re starting to see these big rallies, it doesn’t mean you have to get out completely, but maybe try to book 2/3 of your profits, at least along the way so that final third. Isn’t absolutely detrimental to your success on that trade if you do get a big gap down that it’s if it keeps on running, that’s like your cherry on top.

11:57
And speaking of those cherries on top, check out swing Trade in the Stock Market.com. It’s my Patreon account that’s associated with this podcast. With it, you’re going to get all of my stock market research that I do all throughout the week. Each and every day you’re going to get multiple updates on my daily setups, stocks that I’m looking to trade each and every day.

12:16
I’m also going to provide you. With multiple trade setups in the most interesting charts that I come across that it also includes weekly updates on all the FAC stocks Facebook, Apple, Amazon, Netflix, Google, Microsoft, Tesla and you’re going to get weekly updates on the S&P 500, the NASDAQ 100, and the Russell 2000 plus some of my indicators that I’m following and I find pertinent to the market at hand.

12:40
Check that out again. Swing Trading the stockmarket.com. You’re gonna get all of my market research, check that out and support this podcast. One of the biggest questions that I get when it comes to stocks is, hey, what do you think of stock ABC? It’s up 30% today. Is it worth buying at this point?

12:57
Always tell people, no, it’s not worth buying because you didn’t anticipate that move. And a lot of those moves are very difficult to anticipate because they’re coming on news that nobody was expecting. But you can play the breakouts of a stock and you get in at that breakout level, maybe you’ll only get 5 or 10% off of that trade.

13:13
And that’s still a pretty good trade, but maybe they do get a big news piece following that breakout that shoots it up 100% or 50% or 25%, and that’s phenomenal. But don’t go chasing it after a fact. I mean, it’s kind of like a lazy way of trade. It’s like, oh, it’s up 30%. I’m gonna try to get in and see if it’ll go up 50%.

13:29
Why was everybody chasing Dogecoin at 60 cents a coin? Because they saw how much it already moved. They got lazy, they didn’t want to do their diligence and try to find the next breakout. Play and just simply settle for what might just only be a 5 or a 10% profit, which is good, but no, they wanna go chasing after something that’s gone from a couple of cents a coin to 60 cents a coin and say, you know what, I’m gonna get in right now because everybody else is.

13:53
I want profit like everybody else because they think everybody else is getting rich, which is not true. It’s usually just a handful of people that are getting rich all of those kinds of moves, but they wanna get into it and then all of a sudden they see it go from 60 cents all. The way down to 15 cents a coin and now they’re wondering how did I just lose 75% of my capital on this coin when everybody said it was going to the moon and then colonizing Mars.

14:16
Guys, don’t chase. When you chase, you open yourself up to massive gap down. That’s the best way to avoid a big gap down is by not chasing a breakout play after it’s way beyond the breakout point. It’s hard not to, but you have to because when you start chasing, more than likely you’re going to get in at the tail end of a massive rally, which subjects you to a massive gap down just like what we saw in NEgg, just like what we’ve seen multiple times in GameStop, AMC CCIV.

14:49
They’re countless and it’s not just new to the meme stocks out there. It’s been going on for ages. It’s been going on for as long as I’ve been trading and beyond that. If you enjoyed this podcast episode, I’d encourage you, please leave me a 5 star review on. Whatever platform that you’re listening to me on, subscribe, follow whatever they offer, do it because it really helps me to continue to grow my audience and my base, and I just love doing these podcasts with you guys.

15:14
And if you have any questions, please send me your questions, ryan@shareplanner.com. I do read all your emails and I try to make a podcast episode out of every one of the questions that I can actually do an episode on. Make sure to send those to me, Ryan at shareplanner.com. Thank you guys, and God bless.

15:32
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15:50
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16:10
All the best to you and I look forward to trading with you soon.