Reviewing a Trading Plan (Part 2) | Podcast Episode #182

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 we’re gonna continue with part two of reviewing a trading strategy here. Last week, you remember, I was going over an email from a guy we called Merv, and Merv had all these questions.

0:46
He was asking about different setups, about how many long positions he should take, and how many short positions he should take, how many patterns he should know, etc. And if you weren’t able to listen to that episode, I’d encourage you to go back and listen to that episode first and then come back and listen to this one. Now, let’s go ahead and start with the two questions that he has remaining on his email about the trading strategy he wants to employ.

1:09
First question, he says, I noticed some traders follow the price action and look for patterns like cup and handle patterns, double tops, and then uses some terminology. I’m not really quite sure he talks about how these double tops and cup and handle patterns play in the. As they run, they’re not breakout traders, but more like trend traders, while others buy only the breakout setups that they know, they let it run until it loses momentum, and then they get out of the stock and look for more of the same breakout setup patterns again, rinse and repeat.

1:36
I think I know what he’s trying to say. I just think he’s wording the question wrong and we’ll get into that in a little bit. So if you’re confused by what he’s asking there, don’t worry too much. We’ll dissect the question. He says, I’m leaning towards Plan B, where I’m just trading breakouts, as it seems most manageable for a new trader, and learning the specific details of the hundreds of patterns seem difficult and more prone to errors.

1:55
What’s your opinion on this? Question two is, some experienced traders claim that they can learn all they need to know from watching only the price and volume. Seems simple, but is that reliable? Seems that they can see the big money. Acquisitions coming in by the volume patterns driving up price and get in with the big purchasers like institutions, etc.

2:13
Great if that works, but that seems crazy to me. Is that fantasy? Must work. What are your thoughts on this? Thanks for all your help and effort, Merv. All right, Merv, you might be one of the first people to get 2 episodes out of me for one email, but nonetheless, we’re gonna go with it now.

2:29
The bourbon for today is Hayes Parker Reserve. I did this one a long time ago, but I didn’t give a score on it, and I can’t remember even what it tasted like, honestly, but I wish I could say that I don’t remember how it tasted like because I don’t think I’m gonna forget it this time and I’m not sure why it didn’t stand out as being as awful as it is tonight when I’m doing this podcast, but.

2:48
Let me tell you, the smell is really funky. I mean, it doesn’t please the nose at all and the taste, there’s like this like hint of OKness when you initially taste it and then it just goes really bad. The best way to compare it is when you go into your medicine cabinet, you grab some Tylenol, you pop the two pills in your mouth, and then you realize you need some water to swallow it.

3:08
And so, you already got in your mouth, you’re not swallowing the two pills. You go to the refrigerator, grab a thing of water and you start drinking it. But in the meantime, between the time when you pop the pills in your mouth and the time you go to your fridge to get the water to swallow the pills, those pills start to dissolve on your tongue and it leaves this like really nasty taste.

3:27
Like pills weren’t meant to just like sit on your tongue and dissolve. And that’s what this bourbon tastes like. It’s horrible. It really is. I give it a 33. If I can’t even finish it, there’s no way I can give it over a 4. And this one doesn’t even come close to finishing. This is a throw it in the sink kind of bourbon.

3:44
It just is not good. So thank goodness I only got a little taste sample of this thing because it is awful. I would not recommend getting it. Hayes Parker Reserve, it’s 45% alcohol, 90 proof, and it’s small batch, and it’s horrible. Now, back to Merv’s questions here.

4:06
He says on the first question, some follow the price action, look for patterns like cup and handle and double tops and play them as trends. Cup and handle, I don’t. consider cup and handle trend plays. I mean, really trend plays are where you have an established series of higher highs and higher lows, and there’s a line that you could connect all of those higher lows with, right? And every time it comes back to that trend line, that’s where you get long at.

4:22
Cup and handles aren’t really like that. You’re really playing a breakout of a higher high. And so for those who don’t know what a higher high is or having a hard time imagining that, just imagine like a stock goes up and it comes back down a little bit and it goes back up but goes even higher this time. Well, that’s higher high, and then it comes back down but doesn’t go as low as it did before, that’s your higher low.

4:42
So, really like a cup and handles like a breakout pattern. Double tops are a breakdown because you’re playing that breakdown of the previous low on the stock. So, both are breakout breakdown kind of plays. Now he says he’s leaning towards Plan B where he only plays breakouts.

4:58
Well, that’s gonna be your cup and handle patterns too. And he wants to let his trades run until they lose momentum and then get out of the stock and then look out for the same kind of patterns again in a rinse and repeat fashion. Well, you gotta remember, different markets are going to give you different kinds of patterns.

5:14
So you do have to have a little bit of a broad understanding of some of the patterns out there, like the inverse head and shoulders patterns, like bull flags, bull flags, triangle patterns, they’re more like continuation patterns and are already rising market. Your inverse head and shoulders patterns, they’re going to be more like basing patterns in the market that has recently fallen or in a stock that’s recently fallen.

5:34
So the bull flag patterns, the triangle patterns, those breakouts through resistance, that’s going to happen in a lot of your more trendy markets, whereas these long base patterns and these periods of where the stock is just going sideways following a big sell off, that’s gonna be more prevalent in stocks, industry sectors and in the broader market that has been recently in decline and finally putting into a base there that you can trade off of.

5:54
Now, the basing patterns are usually going to give you some of the best opportunities to make the biggest gains because it is coming off of a substantial sell-off. That’s why really in this market right now, everybody keeps buying the dip and nobody wants it to go down, but really to get the best trading opportunities right now, we need a 5 or 10% correction in this market.

6:17
Without it, you’re really just fighting for crumbs each and every day. And that’s part. I mean, it’s not that you can’t be profitable, but it is hard. And so we keep trying to squeeze these gains out of a market that’s already been squeezed of all its juices. It’s like trying to get water out of a rock at this point.

6:33
There’s just nothing there. So we make these marginal new highs and then it pulls back and you’re like, crap, man, this really sucks. It’s like you can’t get enough momentum to sustain a swing trade position for more than a week or two. And so I bring that up because for Merv here, he’s trying to just rely.

6:49
In a couple of patterns, but you really need to go beyond those couple of patterns here and really try to expand your knowledge of different patterns because different patterns are going to work in different kinds of markets or are going to be more prevalent at least. When a market’s in a strong decline, you’re not going to see a lot of bull flag patterns. You’re not going to see a lot of triangle patterns.

7:06
You’re more likely to see bear flags. You’re more likely to see triangles that are breaking to the downside, and you’re more likely to see the bases that start to form. And on the surface too, letting a stock run until it loses its momentum is great. That’s what I do. I let it do that all the time, but I also think too that you’re never going to time the top of the market.

7:23
You’re never going to get out and at that point where it’s lost all momentum and you’re completely out at the top of a trade. Instead, and I’ve mentioned this before, and I even think I mentioned this in the last podcast, you want to get the middle section of a run. You wanna get the easy money. You don’t necessarily have to time the bottom of the market.

7:40
You want to get the breakout of the base where it starts to push higher, higher and higher. And then at some point. It’s going to top out and it’s gonna start pulling back some, you’re going to lose a little bit of those gains at the top, but eventually you’re, because you’ve been raising that stop loss along the way, you’re going to get out. Also, I talk about this all the time, but I think it’s a good idea to take partial profits along the way and a strong bullish market, maybe you’re only taking a third of your profits at a time.

8:04
But then in a market where it becomes a little bit more uncertain, you’re taking maybe 2/3 or a half position off the table, and you’re letting a smaller portion of your trade continue to run higher. Now, again, you don’t have to know. Hundreds and thousands of patterns. You don’t need to know every single pattern that’s out there. I don’t know every single pattern that’s out there.

8:20
I’m in the trading block and somebody will throw something out there that I’ve never even heard of before or a candle pattern that I’ve never heard of, and I have to actually Google it to figure out what they’re even talking about. You don’t have to know all of them, but you need to know enough for the different kinds of markets that are out there. You need to know some different short setups. You need to know what some of these basing patterns look like, what some of these continuation patterns look like.

8:38
You want to have a good understanding of like the topping patterns. You want a wide range of patterns for the different kinds of markets that are out there. Now, the second question, some experienced traders claim that they learn all they need to know from watching only the price and volume seems simple, but is that reliable? Seems like they see all the big money acquisitions coming in by volume patterns and then they get in with big purchasers like institutions.

8:59
Great if that works, but that seems crazy to me. Is that fancy? So here’s the thing, you don’t watch price and volume to figure out what stock’s gonna be acquired next. I think in my lifetime, I’ve had like 2 or 3 stocks that I’ve been in that got acquired. And then there was one that I got stopped out of, LinkedIn. You’ve probably heard me talk about this in some of the older podcasts, but I literally got stopped out of LinkedIn 30 minutes before it was acquired by Microsoft.

9:21
It was a Friday afternoon, got stopped out of LinkedIn probably at like 3:30 p.m. Eastern time. The market closed at 4:00 p.m. That was Ellen KD. That was a stock symbol back then. I wake up one morning and LinkedIn’s been acquired by Microsoft.

9:37
It was like a 60% premium on Monday. Let me tell you, I broke a keyboard over it. I was pretty pissed. And for those wondering, am I still drinking this Hays Parker? No, I actually made myself an old fashioned. I’m drinking good stuff. So how do I trade? I trade off of price and volume. That’s all I trade off of. I mean, I have some indicators that I watch every once in a while, I’ll look at the RSI, but mainly the only indicator that’s on my chart is the stochastics indicator, and I don’t really rely on that at all, but I’ll just look at it just to see, OK, where are we at on this stock?

10:03
Has it been trading like at 98, 99 over bought for 3 or 4 weeks? OK, maybe I don’t want to be getting in at that point because it’s just been overbought for so long. Perfect example of that of late is Apple. Apple was trading out like a 99 stochastics on its weekly chart.

10:19
I said, even if I wanted to get into the stock, I’m not getting into it because it’s just so overbought. And sure enough, like over the next few days, it dropped like 3 or 4%. I’m not saying just because the stock’s overbought, you shouldn’t never get into it. Sometimes these stocks can stay overbought for weeks if not months at a time.

10:34
But if it’s just getting like extreme overbought, like 98, 99 reading is just sitting there on all the time frames, market’s getting a little bit crazy, OK, maybe just hold off a little bit, wait for that pull back. So I do use the stochastics to some extent, but it doesn’t really guide a lot of my trading decisions.

10:51
I really just focus on volume. Now, I don’t think there’s volume patterns that are going to suggest, hey, this stock is going to be acquired. It just doesn’t happen that way. I mean, stocks can have high volume because the market’s having high volume. Stock can have high volume because it just reported earnings or it had a big news piece that just came out of it.

11:06
There’s a lot of reasons why you might have unusual or abnormal volume activity, and that doesn’t mean the stock’s going to get acquired. Look, nobody’s gonna acquire Apple, right? But that stock is prone to have high volume days as well. So it just doesn’t make sense to say that, OK, there’s gonna be some big money acquisitions coming in because the volume patterns are saying as much.

11:26
It just doesn’t happen. Nobody, uh, really knows when a stock’s going to be acquired. I’m sure there’s some, and I’m sure there’s some that do some insider trading on them, but on the whole, most people don’t know that stuff. But I do say this, price and volume do work because most of your indicators, almost all your indicators, they’re all subsets of price and volume.

11:45
I like to look at the T 2108 indicator because it tells me the percentage of stocks that are trading above their 40 day moving average. And if you’ve been looking at that particular indicator of late, the percentage of stocks trading above their 40 day moving average, you’ll see that over the course of this past year, going all the way back to December of 2020, fewer and fewer stocks are participating in the market rally.

12:03
So it gives me a lot of concern about this overall market and the health of this overall market when the market keeps posting new all-time highs, but fewer and fewer stocks are even participating in it, and more and more money are just going to the 5 to 10 biggest stocks out there right now. So indicators can be of use, but most indicators are going to be a subset or a derivative of price and volume.

12:24
So why not just be good at looking at price and volume and especially with price patterns because you’re going to see a lot of the behavior of the stocks materialized through the price patterns and I think there’s a huge over-reliance on indicators in general. People are like, oh, the RSI is at this or the McKellen indicators at this, or the MacD saying this, and they base all their trading decisions off of that.

12:46
In fact, I’ve seen some people, they don’t even use price or volume. They just use all indicators to determine. They don’t care where the price is. They don’t care if the stock has gone up 20% and one day they’re just looking at their indicators and if their indicator says as much, then they go for it. Now, on the surface, that sounds great, but it doesn’t mean that you’re managing risk.

13:05
How are you going to manage risk just by going off of the indicators? You need to see the price action to make sure that you’re managing the risk appropriately according to the support and resistance levels that are out there. And one of the things I’d encourage you to do too is to check out swingtradingthestockmarket.com. It’s a really really good product that I offer for people that want to support this podcast.

13:26
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13:42
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14:01
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14:22
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14:44
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15:06
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