Reversing the Trade | Podcast Episode #198

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 Trade in the stock market, and I got a good episode for you guys today. We’re gonna talk about reversing the trade just because you get stopped out of a trade, should you get short on that same exact trade.

0:42
Basically, what I’m being asked here is like, hey, if I get long on a trade. And the stock goes against me and it hits my stop loss. Does that mean it’s bearishing that I should get short on it? That’s what I’m gonna talk about in today’s podcast. And the name that I’m gonna be giving to the person for this podcast is Cooter, good old Southern Florida redneck name, Cooter.

1:05
And Cooter writes, Brian, sorry about your Miami Dolphins. Yes, I am a Miami Dolphins fan and they suck right now. He says, my question is this. What indicators should I look at or how do I know when to buy when a stock breakout is under way, and how long should I wait to enter the position?

1:23
And my second question is this When one of my stocks goes the other way and hits my stock loss, how risky is it to short the position that moment I sell it? Cheers, Cooter. Now technically, when you’re shorting stock, you’re selling it. So, it’s basically like a double sell here that he’s talking about here.

1:41
You’re selling it because the stock that you have bought gets you stopped down and then you’re selling it again or shorting it because You think the stock’s gonna keep going lower. Now, what am I drinking? My choice of drink comes from Old Smokey, Tennessee, Gatlinburg, Tennessee, in fact.

1:59
It is mountain made cookies and cream. Now, here’s the disappointing part. It’s 17.5%. Now, I have a rule. I can’t give anything that’s less than 40% above a 5%, and this one falls far below 40%.

2:17
This comes in at 17.5%, that makes it 35% proof. Basically, the proof isn’t even higher than the required alcohol content in order to get above a 5. So, it’s kind of a spoiler, but it’s not gonna be above a 5. Now I’ll tell you this, when I drink it, it’s pleasing, it’s tasty, it’s tastes like cookies and cream.

2:37
That’s what they label it as cookies and cream. It’s like a liqueur, they, they market it as a liqueur, but because it’s from Old Smokey, Tennessee, I gotta give it a shot, right? I like the moonshine or some of the moonshine, and the cookies and cream is good, but it needs to be mixed with something. And I don’t really know what you would mix that with.

2:53
I feel like almost. You have to drink it by itself because it has such a strong flavor to it. I even tried mixing it with some fireball whiskey. There was too many problems there. It was like spicy with a fireball taste, but you also had the sweet cookies and cream taste.

3:08
It just didn’t seem to match. The one thing it actually did work in is my wife was eating some Count Chocula cereal. Yes, Count Chocula, that’s straight out of the 80s. And uh I saw her eating and I thought it’d be cool to just pour some of it in there, and she gave me this little quizzical look, but then she was like, ah, it’s not bad.

3:25
So, maybe it works for Count Choculaceo, this old smoky Tennessee. Cookies and cream McCor. So my score is gonna be a 38. I can’t go any higher than that. I mean, it’s better than Southern Comfort, I’ll tell you that. And a lot of the whiskeys that I’ve reviewed on here, I’d rather drink that instead.

3:41
It’s almost like a rum chata, and rum chata actually does go good with fireball whiskey. It gives you like a cinnamon toast crunch flavor. So back to the email here. He asks a lot of questions in this particular email. He’s asking about indicators, he’s asking about breakouts and when do you enter them?

3:59
And now, A lot of these would take many episodes to cover. So the main part of this, and I’ll get to it towards the end, will be reversing the trait because that’s probably the more unique question that he’s asking here. As far as indicators, I will use.

4:16
Indicators for myself, but I don’t rely on them. They should supplement your trading. You don’t want to rely on indicators and a lot of people do that. A lot of people think that those indicators are what makes or breaks your trading. And if you’ve been doing it for long enough, you’ll realize pretty much every indicator is a function of or a derivative of price and volume.

4:37
That’s all it is. It’s just creatively displaying it in a different way. So, you want to remember that. You don’t want to be basing your decisions off of a derivative of price and volume when you can just go and learn how to read price and volume itself.

4:54
So your main focus as a trader really should be understanding price and volume and a lot of people say, well, that’s what everybody has access to, but it’s what most people don’t even look at or at least really dissect the way that they should performing the good technical analysis on it that they should evaluating risk and evaluating reward on those charts.

5:13
Instead, most people will say, oh man, this stock has rallied 100% in the past week. I’m gonna get along on it now. That, that’s not what you wanna do. That’s usually how most people look at price and volume and usually it’s just price. But volume is important too because more times than not, it’s important to have volume pouring into a stock when it’s breaking out.

5:32
And when it’s not breaking out on strong volume, you’re increasing the chances of there being a head fake on that trade. So, you do want the volume. That doesn’t mean that you can’t play breakouts on below average volume because they can work and work often.

5:48
But The odds increase as the volume increases as well. So follow the price and the volume more so. Use the indicators as a supplement, not something that you rely on, but as a supplement, like almost like a confirmation, like, hey, I’m looking at getting in at Home Depot here at $350 a share.

6:08
It looks pretty solid right here. Let’s. What the indicators do too, because the price and volume looks amazing and then you say, OK, the RSI is doing well, the MacD is doing pretty well. It’s coming off of oversold conditions. Yeah, I, I think this is pretty good and especially the indicators are helpful too when you’re trying to decide between let’s say if it’s Home Depot and Lowe’s.

6:26
Well, OK, let’s go look at the indicators and see how those line up, you know, let’s see which one’s telling the better story. But in the end, it’s gotta be price and volume and not the indicators that drive your trading decisions. Now the indicators that I put on my charts and I’ve actually just added two new ones, not because I needed to, just because I like, hey, I had some extra real estate on my charts.

6:45
Might as well add a couple of indicators on there. I added the MacD and I added the RSI. So both of those are on there, and I’ve always had stochastics on there because I do like to follow how oversold or overbought a stock is. Sometimes when a stock is like 99 over bought or 3 oversold, that will oftentimes be something to help supplement my decision making when it comes to.

7:08
Buying a stock when a stochastics is at 99 or shorting a stock when the stochastics at 3 because oftentimes when you get into those extreme levels and it’s gonna be readily obvious on the chart when it gets to those levels. So it’s important to make sure that you’re not getting in on a long position on extreme conditions like for instance, right now VOYA.

7:28
Is a chart that is very, very overextended. It’s from like 14, 15% in the last few weeks, and it’s had nothing but green candles, but it did break through some key resistance that to a new trader might seem like, oh, this thing’s about ready to break out, but is it?

7:45
Because it’s already made this huge run and there’s a good chance it’s gonna pull back to some kind of support level before it takes that next leg higher so it’s better to wait for the pull back, get in at a lower price before taking that that next push higher there. While stochastics can tell you just how overbought a stock is, enough time, price and volume, you don’t even need to look at stochastics to be able to know that it’s overbought.

8:06
I mean, most of the time I’m just looking at it as more of a reference point just to how overbought it is, not to actually see if it is overbought. I mean, I can look at any chart, tell you any day of the week whether or not a stock is overbought or oversold or somewhere in between. Yeah, I like the RSIs too. I like the MacD’s.

8:22
I mean, I like the RSI’s and the MacDs just from the standpoint of if I’m looking at a bounce play here and the stock’s been. Hovering around a key support level trying to get that momentum building up to be able to bounce higher. I wanna be able to see is the MacD is the RSI starting to show signs that it’s wanting to go higher?

8:39
Is the MacD and the RSI seeing any kind of like crossovers or any kind of pushes back to the upside? That’s sometimes how I will do that, but I have to have before I even look at those things, I have to have price and volume confirmed that there is a trade set up there. A lot of people too are using volume-weighted average price indicators.

8:58
That’s VWAP for short. Those can be pretty good too. I use them more as like a moving average if I use them, but those can also become quite handy at times. It really It comes down to this. You don’t want your strategies to be based off of the indicators when you can base them off of what the indicators are based off of.

9:17
You follow me? If you don’t need to follow MacD and RSI is what you make your decisions off of when you can go to price and volume, which is what the RSI and the MacD and all these other. Indicators are based off of. You go to the source and so the more that you rely on price and volume, the better off you’ll be.

9:36
Now, before I get into breakouts, remember to check out swingtradingthestockmarket.com. This is a great, great platform for you to get all my market research each and every day. This stuff has everything that you need to be a successful trader. You’re going to get each and every day my List of daily setups that I’m following, the most intriguing charts that I come across each day.

9:55
I’m gonna send those out to you. You’re also going to get weekly updates on all the Fang stocks, Facebook, Apple, Amazon, Netflix, Google, Microsoft, Tesla, and you’re going to get updates on the S&P 500, the NASDAQ 100, the Russell 2000, not to mention my weekly watch list, my master watch lists that I work all my setups off of.

10:13
So check that out, swingtradingthestockmarket.com. Now about the breakouts. Now I won’t spend a ton of time on this because there’s plenty of episodes where I’ve talked about this, but it doesn’t hurt to go back and reinforce a lot of what I tell you. That’s why I don’t mind repeating myself on podcasts because the more often you hear it, the better off you’re going to be because you can lose a lot of details just listening to a podcast.

10:36
Yes, you’ll get the gist of what I say in a podcast, but that doesn’t mean that you’re gonna remember everything. So reinforcing those things can’t hurt anybody, right? Now, The breakouts are always fickle. You have to go into the breakouts knowing that you may get a head fake. That’s just part of the game.

10:53
Head fakes happen and I know as hard as we try to not be victimized by a head fake, and when I talk about a head fake, a stock that breaks out and then goes right back down. As much as we want to avoid those, they’re going to happen. I have one on my portfolio right now. I don’t know for sure if it’s gonna be a head fake, but it broke out pretty nicely.

11:09
Airbnb, AirBnB, the symbol. But the last couple of days, it’s just pulled back so now it hasn’t broken my trade thesis at all, but I’m a little bit concerned about it at this point in time. So you want to remember that you can’t avoid head fakes entirely, but that’s why volume is important.

11:25
Also, what’s important is to make sure that you’re looking at the chart from a standpoint of is there a history of head fakes. If you see this huge resistance level that it’s trying to break out and you’ve seen in the last two weeks, it’s tested at 8 times and 7 of those times, it’s gone above the resistance level, but by the close, it’s gone right back below the resistance level.

11:44
Well, that’s a sign that it’s struggling to break out, so. That tells you right there there’s a lot of head fake potential there. And so you want to make sure that you take a more cautious approach to the trade. Maybe that means waiting towards the close to make sure that it’s going to finish the day above the resistance level before getting long.

11:59
And then, and I think this is the most intriguing question about Cooter’s. is that he says, should I go ahead and short the stock when I get stomped out? And I’ve thought about that too. I was like, man, I should just go short. But no, because I think really, then you’re setting yourself up for a disaster because when you get stomped out of a trade, doesn’t necessarily mean that it’s gonna keep going down.

12:18
I have plenty of stocks that when I get stomped out of it. They go back up. Does that mean it was a bad time to get stopped out? No, not necessarily. Sometimes it just means it’s gonna consolidate there, but what a stop loss really means, not that it’s a bearish stock all of a sudden, it means that your trade thesis has been ruined.

12:34
The reason why you got into the trade no longer applies to the trade at hand, so therefore you’re getting out of it. If your trade thesis is still valid, then you stay in it. The stop loss represents where does the trade thesis not validate itself anymore? Where is it no longer a valid trade setup?

12:50
And that’s where you wanna put your stop losses at. That’s why I’m against trailing stop losses that I’ve talked about a number of times in previous episodes. I don’t like them because it doesn’t invalidate trades when they necessarily get hit. So, stop losses should invalidate a trade, not necessarily be a signal for getting short on the stock.

13:07
And so you don’t want to be shorting stock just because you got stopped out of your long position because it might not be a short set up there anymore. Now that doesn’t mean That applies to all cases. Yes, you may get stopped out and all of a sudden there’s this magnificent head and shoulders pattern that is formed and, and it may justify you getting short on the stock.

13:26
That’s OK, but don’t blindly get short on a stock just because you got stopped out of it. What that comes down to is revenge trading revenge trading equals emotional trading, and I would be willing to guess that Cooter’s reason for wanting to get short is because he doesn’t like getting stopped out. And when you don’t like getting stopped out, you want revenge trade and you wanna make.

13:42
Money back rather than just taking that money that you still have and applying it to your next trade and trying to use the same risk management positions that got you out of the previous trade in hopes that you can ride a winner that not only makes up those previous losses but goes way, way higher if you’re going to get short because you got stopped out of a trade that doesn’t preclude you from having a valid trade set up on hand.

14:03
There needs to be trade thesis just like there was a trade thesis that made you get long on the trade. And when it was invalidated, you got out of the trade. There needs to be a reason why you would short the stock after getting stopped out of it from being long. There has to be a set up there. You just don’t do it because you got stopped down and if you get stopped out, it has to go down.

14:20
No, oftentimes stocks will go right back up and then all of a sudden you’re shooting yourself in the foot unnecessarily. You’re taking an unnecessary loss. So to wrap it up, some of the indicators that I like to use, but I don’t rely on them for my trading decisions, they just supplement trading, and most of the time I don’t even reference them.

14:39
That’s the MacD, the, the RSI. They’re pretty popular, the stochastics. You can get them anywhere. Volume weighted average pricing, that’s like a moving average that a lot of people put on their charts. They can be helpful. Breakouts, you want to be careful about head fakes by looking at volume and whether or not there’s a history of the stock unable to break through that resistance and closing back the load on previous attempts to break out.

15:03
Check that out. Also make sure that You’re not operating under the belief that you can avoid head fakes completely because pretty much every losing trade on a breakout is probably the result of a head fake. So unless you’re trading 100%, you’re going to have head fakes. And make sure that you’re not just getting short a stock because you got stocked out of it.

15:21
That’s revenge trading. There needs to be a set up there because getting stopped out of a stock doesn’t necessarily mean that it’s bearish now, it just means that your trade thesis for why you were along is invalidated. If you enjoyed this episode, I encourage you to like and subscribe and Make sure to sign up for swingtradingthestockmarket.com because you’re going to get a lot of great research there each and every day of the trading week.

15:42
Plus, Send me those emails, ryan@shareplanner.com. I greatly appreciate those. I base my episodes off of them, so I want your questions. Keep sending me those questions, ryan@shareplanner.com. Make sure to leave a 5-star review. If you find it in your heart to do so, thank you guys, and God bless us.

16:01
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16:18
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16:39
All the best to you and I look forward to trading with you soon.