Small Loss Streaks | Podcast Episode #219

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, everchanging 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 Tradng the Stock Market. In today’s podcast episode, we’re going to talk about losing streaks with small losses and what they mean to the portfolio and how you can avoid them.

0:42
Today’s e-mail comes from a guy who says you can call me Ichabod. You write, Hey Ryan, I love the podcast. I have learned a lot over the past couple of years listening. I was doing pretty well swing trading in early 2021 and have really took your maxim of managing the risk to heart.

1:00
I have always used stop losses and has protected me from big losses. My issue lately is that I keep taking small losses that have added up to me giving back a lot of my profits from earlier in 2021. I like to buy the dip and I think sometimes I buy too early and buy into something that is still selling off thus guaranteeing me a small loss.

1:22
I have switched my strategy this week and I’m setting up more alerts and waiting for confirmation. Do you have any tips that may help me with this process? Also, are there any swing trading resources or books you would recommend that have a more holistic approach? Most of the books that I read only focus on technicals and strategy that leave out the part of knowing what to trade and when.

1:43
I feel that I am just trading random tickers that I have added to my watch list and could be more strategic. Thanks, Ryan Ichabod now. Pretty heavy e-mail there. But before I get into it, what am I drinking? Well, we were talking about how I was using Evan Williams Bottled and Bond for my old fashions now and they’re pretty good.

2:03
And so I’m going to review the bourbon on its own merit. How does it come out now? One of the things that I learned about this cuz I did take a quick taste of it when I was making the old fashions and it was pretty strong, pretty hot, But I let it breathe. So I’ve had this bottle for like a week and I finally poured myself a glass for this podcast.

2:22
And I gotta say, it doesn’t come in nearly as strong as when I first opened it. And I’ve learned that with a lot of bourbons actually, that it is best to let them breathe a little bit to really get the true flavor of the bourbon itself. Again, it’s 100 proof. It’s Evan Williams bottled in Bond.

2:39
It comes in hot with like an underlying smoothness. There’s like a feeling of like you’re tasting a little bit of honey and vanilla. It’s not okie or smoky or even nutty. It’s pretty solid scale of 1 to 10. I’m surprised I’m going to do this because it’s more than I thought I would give it, but I’m going to give it a 7.4.

2:57
Again, it’s best for the old fashions, mainly because of the price point. I used to really like using the Knob Creek Nine year, but the prices on them are just nuts now. So I’m not doing the Knob Creek Nine year and it’s harder to find. So. So back to the e-mail, Igbod has a lot to unpack here.

3:15
One of the big things that he does says is I’ve always used your stop losses and have protected me from big losses. That’s the main reason for using stops. Now look, if we’re using stop losses that average 3 to 4% and we were guaranteed that the worst loss that we’d ever have on a trade would be 5%, I wouldn’t use stop loss.

3:31
The main reason for stop loss is to keep you from getting in a bad, bad trade that you can’t dig your way out of. And it also keeps you from averaging down, doubling down into stock trades that you should not stay in any longer. So if it’s keeping you from some big losses, they’re doing their job.

3:48
Now, how you’re applying it is something different. He says that my main issue is that I keep taking small losses and that they keep adding up and they give back a lot of the profits that I made back in early 2021. My thought on that is that it’s just not enough to use tight stop losses like 3 or 4% or whatever it is that fits your risk profile in relation to the reward that you’re seeking on each and every trade.

4:12
Placement of those stop losses matter. If you’re not putting them below critical support levels, then it’s not worth trading. I mean, I can’t tell you how many trades that I pass up on over the years, and they could have been pretty good returns on the trades, but the risk setup was not there.

4:30
I could have gotten into it and it would go up another 1020%, but the stop loss required like a 10 or 20% stop loss. So it wasn’t right for me that if it did work against me, I couldn’t manage the stop loss in a way that I wanted. So I couldn’t keep my risk tight.

4:46
And the reason why I couldn’t keep it tight is because I couldn’t put the stop loss below a key support level. Key support levels they can come in the form of like price support. You know where you see like a stock if it pulls back to 100 every time and balances consistently at $100 okay, there’s a key support level there.

5:04
Maybe it’s a rising trend line where it pulls back to $5 and it pulls back to $10 and pulls back to 15 and 20 and 25 and 30 and you got this track record of where it consistently pulls back to the rising trendline. That’s the case. You got yourself a good support level to work with that if it breaks below that trendline, you know that you don’t want to be in that stock anymore.

5:25
So placement matters. It’s not enough just to keep the stop losses tight, you got to keep the stop loss below key support levels. When I raise the stop loss, I’m raising it to another support level or just below another support level. The other thing to make sure of is that you’re not getting into trades with nearby resistance, because then it’s not so much the problem with the risk side of the trade, it’s really a problem with the reward side of the trade.

5:49
If you have nearby resistance, like you have this inverse head and shoulders breakout opportunity, and it looks really good on the surface. You get into it after it breaks through the neckline, and then you have a declining trendline that’s just overhead, maybe like 1 or $2.00 above on a $80.00 stock, and it hits that trend line and it sells off.

6:08
Well, where was your reward at? Was it at the declining trendline? Because that’s really where it should have been because that was resistance. And so you went into the trade with a false narrative on what the reward potential was. So yes, it could be that you’re not putting the stop loss below key support levels.

6:25
But it could also be that you’re not taking into account the reward aspects of the trade and the potential resistance that lies just above where you’re getting in to the trade on a long side. And if it’s on the short side, you may be trying to short a stock with support right underneath your entry price.

6:42
He says too, and this was the middle paragraph on his e-mail. I like to buy the dip and I think sometimes I buy too early and I buy into something that is still selling off, thus guarantee me a small loss. Let me tell you a lot of people, if you keep buying, spying, I had to learn this the hard way myself. A lot of people will buy, you know, a market sell off and they’ll use something like Upro or a 3X and they just see it diving and diving and diving.

7:03
It’s like, man, the market’s already dropped 10%. Not that a lot of people have seen that actually, hopefully. But harkening back to yesteryear when that actually did happen in the stock market, the stocks, they’ll drop like 10% and they think, OK, this is the time to buy the dip and people still do that now with a 2% dip.

7:18
People literally are like thinking that these are generational buying opportunities when the market just dips 2%. But nonetheless, whether it’s 2% or 10%, if you’re just blindly buying the dip, there’s a good chance you’re not going to be right and it’s not enough for Okay. You see the market sell off 10% and you get a sharp bounce.

7:37
Well, those short bounces could just be dead cap bounces that ultimately will lead the market even lower. And when you have a lot of panic and you have a lot of fear in the market, those intraday bounces can suck in. A lot of people thinking that the bottom is in. When it’s not, it’s just a relief rally that it’s going to be sold and it’s going to drive price even lower.

7:56
So just trying to buy a stock on the dip is not a good strategy. There’s going to be a lot of people that get their heads handed to them when this market does sell off ten 15 20%. And we’re on the wrong side of the Fed right now where the Fed is looking at raising interest rates.

8:11
And we talked about don’t fight the Fed. Well, right now, the feds kind of against the market. They’re wanting to end the taper. They’re wanting to start selling their treasuries, They’re wanting to raise interest rates. And there’s even talks out there about a double rate hike in March where they’re going to do like 1/2 percent rate hike.

8:27
I’m not saying that that’s for sure going to happen. I would probably say the odds are that it won’t happen, at least not at this moment. But there’s actually talk about it. So what are people going to do when this market starts to sell off more than what they’ve seen it happen before? Well, they’re going to keep buying the dip.

8:43
And when they buys the dip and the market keeps dipping, then what are they going to do? They’re probably either going to be out of capital to allocate to the market, they’re going to go into margin or they’re just going to keep throwing their capital at it. Either way, it’s all losing recipe depending on their circumstance. So a dip buying strategy alone is not the best way.

9:00
I mean, look at Alibaba, it’s gone from plus 300 down into the one 30s. How often has people been buying the dip on that one? And it’s yet to really bounce. And there’s been times where it looked like it, but it just didn’t actually materialize. So don’t just make dip buying a strategy in the market.

9:16
I know a lot of people glamorize it, but a lot of those people are trying to suck other traders into the mix to buy their meme stocks or to buy something else. And so they suck people into it. And yes, they might walk away a winner on the trade, but there’s a lot of losers that come as a result of that. I thought about how he’s has switched his strategy this past week and he’s setting up more alerts and waiting for confirmation.

9:37
And one thing that I’m kind of curious about is, is the dude over trading? Is it about over trading? And the other question that I would ask is, is he trading against a bad market, a bad sector or bad industry? Yeah, the NASDAQ can rally, but is the NASDAQ always rallying with software infrastructure, software application, electronic components and semiconductors?

9:57
Not always. A lot of times there’s usually a laggard somewhere in there. So when the Nasdaq’s rallying, it doesn’t mean every industry within the tech sector is actually rallying. Perfect. Case in point is Amgen AM, GN, this is a biotech stock. It’s been rallying hard since October and the biotech is part of the healthcare industry.

10:14
Well, we got a bad market right now as of this podcast post where the markets just been turning sideways for about 3 months, giving some potential to some further downside risk. The sector for healthcare has been awful. Biotech’s been awful. Now Amgen’s actually done pretty good since October, but why would I want to trade a stock that’s setting up?

10:33
And even if it does ultimately move higher, more times than not, those stocks are the exception rather than the norm when you’re getting a good trade set up, but it’s in a bad industry, in a bad sector. And regardless of whether or not the market’s good or not, let’s say the market’s good, Why would you want to try to trade that stock when the sector and industry is not performing well?

10:52
In the case of Amgen, biotech sucks right now and the healthcare sector sucks, so there’s no point in getting into Amgen. Yes, it may still keep rallying. It can buck the trend, but more times than not, that’s not going to be the case.

11:07
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11:22
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11:43
But one more point though too about the dip buying this just kind of comes to mind is that the longer you wait to buy the dip, usually the better off you’re going to be. It’s usually those initial bounces that we get sucked into and it’s really just dead cap bounces that continues to see the market dip lower and a lot of people are starting to see that now with the choppiness over the last three months.

12:01
They keep buying at these all time highs and immediately the market makes all time highs and it sells off right back down to a key support level. You don’t want to get caught up in that being on the wrong side of the trade of every little market swing. So oftentimes the best approach is to wait longer than you think that you should wait for the market, the bottom because there’s going to be a lot of people that are buying the dip especially when we do get a legitimate market sell off that goes beyond you know the three or 4% that we typically see over the past couple of years.

12:22
And it really presses and stretches people’s tolerance for what a market sell off should be because ultimately where people get killed is in the large sell offs. They keep buying the dips, they don’t know what to do and then they panic sell at the bottom. One more thing that I would probably recommend to him as well, cuz he talks about how he gets into the stock and he takes some small losses.

12:41
Look at well when you’re like, let’s say you’re trading like a breakout of a declining trend line. We’ve used declining trend lines a couple of times in this podcast episode so far. So let’s stick with that thing. Is there a history of it actually breaking above the declining trend line intraday and then selling back office? So you’re better off waiting for price to close above the declining trendline before you actually dip your toes into the stock.

13:03
That way you don’t get sucked in intraday only to see it finish lower and then sell off the following day. Finally, he says what kind of books do I recommend? They have a more holistic approach. One of the best books that I recommend to a lot of people is, and it’s my favorite book by far, Reminisces of a Stock Operator.

13:20
I never say that word right, but reminisces of a stock operator about the legendary trader Jesse Livermore. I think, well, I won’t give away the ending if you haven’t read it, but did a lot of things right and did a lot of things wrong. But there’s so many good antidotes in that trading book and it talks a lot about strategy and mindset.

13:37
Another one that I really think that helps a lot with traders is books by Alexander Elder. He gets a lot into the market psychology and the way you should approach the stock market. He’s another one that I’ve highly do recommend. All right guys, Well that’s gonna do it for this podcast episode. If you enjoyed the podcast episode, I would encourage you to leave a 5 star review.

13:55
That greatly helps me to continue to expand my reach and to grow this podcast as a whole. And as always, keep sending me those emails with questions about the stock market. I want to hear what you guys have to say. I want to know what you guys are thinking. Helps me to provide content to everybody else.

14:10
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14:31
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14:52
If you have any questions, please feel free to e-mail me at ryan@shareplanner.com. All the best to you and I look forward to trading with you soon.