Trading Through Stock Market Crashes | Podcast Episode #221

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 wing training the stock market, and today, instead of doing an email like I usually do, and I’ll get back to that in my next episode, I want to take the time and I try to do this during special occasions in the stock market to talk about stock market crashes because there’s some of the most difficult and tricky times for a trader, and it can really make or break a trader going forward.

0:53
So, the other reason why I like to focus on it, despite the fact that I try to be more evergreen and create. Podcasts that will always be relevant and timeless, talking about strategy and approaches to trading and managing risk that’s what I usually like to focus on.

1:09
But with this one, I’m essentially looking at a specific point in time, a stock market crash, stock market correction, whatever you wanna call it, and I’m gonna to speak directly to that. Now, the reason why I still think that that could be timeless because 20 years from now, we’re gonna wanna know, hey, when you were trading through the big correction or.

1:28
The big recession of 2022 or whatever we end up calling it. What was it like? Well, you can point back to this particular podcast to talk about some of the lessons learned and some of the approaches to take to it in order to be a successful trader, and I think that can help you in future stock market crashes to be able to go back to these kinds of episodes and listen to them and to get the feel for what it was like to trade through that specific time.

1:53
Looking back, I wish I had a podcast episode of me trading through the Great Recession of 2008 or the dot-com bubble of 2000. Podcasts weren’t really a thing back then, so we can only start now with those podcasts that are focusing on stock market corrections.

2:10
Now, we’re gonna talk about 10 things. That I think will help you during this stock market crash, but before I get into it, what am I drinking? Well, I got 4 roses, single barrel, barrel strength, Kentucky straight bourbon whiskey. It’s 54.9% alcohol, which makes it about 109.8% proof, so very strong.

2:31
Now, I’m a big fan of the Four Roses small batch. I think it’s pretty good. I gave it a 7.1 in the past. It’s definitely an everyday sipper, one that I do sip on quite regularly, and it’s very cheap. This was also cheap. I think I got it in the 30s at Costco, if I remember correctly. And now when I drink it, It’s got a little bit of smoothness, slightly buttery, but I do pick up on some hints of vanilla when I smell it.

2:54
It’s smooth to the taste at first, but then you get a pretty strong amount of heat that comes in thereafter, not too much to where it overwhelms you, but you kind of expect that when you start getting over 100 proof on your bourbon. So despite the heat, I’d still say it’s pretty smooth for that high of a proof. a little bit smoky on the taste.

3:14
Heat doesn’t add a lot of flavor and it almost has like a licorice type finish, which I’m not a huge fan of. I would say because of the higher proof, I would give it just a slightly better score than the small batch, but if I’m really being honest with myself, I’ll probably drink the small batch more often than the single barrel.

3:29
So I give this one a 7.2, even though that’s 1/10 of a point higher than the small batch, but that’s only because it has a higher proof. So the S&P 500 rallied about 200 points off of the lows today. That’s following a market that sold off every day of the previous week and did so in a fashion of at least 1% and saw a sell-off that was as much as 11% down on the S&P 500 to start the month of January in just 16 trading sessions.

4:00
By the end of the day though, it was only down 7.4% on the year. It’s actually quite a recovery off of the lows. But isn’t necessarily done? A lot of people will say, hey, we bounced off the October 2021 lows. This is definitely the bottom. A lot of people are hoping for that because they’re desperate for it to be a bottom because they’ve taken such a lick.

4:18
One of the things I’ve noticed about this sell off more than any other sell off is that there’s a very low tolerance for a sell off of any kind. People are not mentally prepared for what can come from a huge and longer lasting sell off than what they’ve seen in the past.

4:35
And since September 2020, we haven’t seen a sell-off that lasted more than 3 weeks, so that means a lot of traders have never seen a sell-off that lasted anywhere beyond 2 weeks. It’s kind of sad in the sense, but it’s also what the Federal Reserves created by keeping the money conditions so easy and by doing all of this asset buying, which was completely unnecessary in hindsight, totally unnecessary and the time they panicked, they created all these new programs.

5:04
Politicians flooded the market with free and easy money, and you got a market that’s just run out of control and you can see how it ran out of control as soon as these policies started getting enacted. Both monetarily and fiscally, the market went straight parabolic, and so now the roosters have come home to roost, they are starting to taper.

5:25
They’re going to start unloading some of their assets by the end of the year, and by the time March rolls around, they’re expected to start raising rates. This is a huge change in the storyline. It’s a plot twist, and most people are not prepared for it. So I’m gonna go over 10 things here that I think that you can benefit from knowing and implementing in your trading during this markets off.

5:47
The number one thing to know is that the market will go down bigger and faster than you could ever imagine. I’ve seen some pretty crazy sell-offs where circuit breakers are getting hit, where it sells off 7% in a day, and hits the circuit breakers, and I’ve seen it go beyond the circuit breakers after they reopen it.

6:03
What you’ve seen so far, these 100 point selloffs or these 3% sell-offs, 2% sell-offs, sometimes just a 1% sell-off. It seems like it’s a big deal to a lot of traders. When the market gets nasty, you ain’t seen nothing yet. I didn’t trade through 1987, but I do consider myself a student of history, and the one thing about October of 1987, there was a single day in the market where the entire market dropped 27%.

6:32
I’ve never seen anything like that, but I have seen a fat finger drive the overall market down 10% in a single day. I’ve traded through some of the craziest moves of the past 20 plus years. So when you think that the market couldn’t possibly go down any further. 1, it can. 2, the moment you don’t think that it’s probably when it’s going to happen.

6:52
That’s why I keep saying that the market takes the stairs up and the elevator down. Now, over the past couple of years, it seems like it’s been taking about 3 steps at a time higher, but nonetheless, the elevator’s gonna be faster and the elevator’s gonna be quicker. When that happens, you’re gonna see some big major red bars, kind of like what we’ve seen in January compared to all the previous months before it.

7:13
Number 2, people are trading desperately and too much. They’re trading desperately, and that is what’s leading them to trade too much. They’re having to trade because they’re taking on losses and they’re trying to do something about it instead of just using simple risk management that I’ve outlined in so many podcast episodes.

7:31
They’re holding on for dear life and trying to make that money back by doubling down, by tripling down, by going and buying massive amount of calls and buying every single dip down along the way and just taking more losses. They’re going into margin. Not every dip is meant to be bought.

7:46
I haven’t bought a single dip yet since this sell-off started, not one. I have been long this month, but once the selling really started getting cranked up, I went ahead and took the profits of my long positions, and I went ahead and got short, but I didn’t buy any of these dips. I didn’t even buy the one today, 200 points off the lows just because I wanted to see the follow through the next day because the follow through is usually the hardest thing for the market to accomplish following a big dip by.

8:09
So not all dips have to be bought. Remember that. Remember that when you’re asking yourself, Should I be buying this dip? We haven’t reached true panic in this market yet. Also remember too that patience pays when you’re wanting to trade desperately and when you’re wanting to trade too much. Tell yourself patience pays. How many trades can you avoid taking losses on by simply not trading them at all?

8:28
Waiting for that really good opportunity off of a key support level, waiting for that dead cat bounce to materialize and play itself out before shorting the market again. Number 3, volatility will expand and create bigger drops that lead to bigger bounces. The more volatile the market gets, the bigger swings you’re gonna see in this market.

8:48
We have a VIX index now that’s been trading over 30%, and yes, you’re gonna start seeing some really big price swings, so much so that it can cover 1% or 1.5% in a matter of 30 minutes or less. It’s like the rubber band effect. The more that you pull a rubber band to one side, and then when you finally let go, it’s gonna have a sharp and violent reaction to the opposite direction.

9:08
And so you’re gonna see that when we have a sharp sell-off. You’re going to see a sharp bounce that ensues, and it’s gonna be a face ripping rally. We got that today with a 200 point rally off of the lows. How many people can say they’ve seen one of those before? Well, it should be expected when you’ve seen the market drop 11% in 16 days.

9:25
You’re going to have even in the worst markets, massive, massive rallies, and that doesn’t mean. That big bounces represent the end of a market sell-off. Big bounces are indicative of a very unhealthy market.

9:41
Number 4, stops have to be honored. If you’re not gonna honor your stops in a bad market, why are you even trading? Why are you even trying to do risk management? In the good markets, there’s often times you can be forgiven for not using the stop loss in a bad market, it can be ruined.

9:57
Of all the markets to use stop losses in, a bad market would be it. I think you should always use stop losses, good markets or bad markets, because you never know when the bad market’s going to actually hit you, but when it does, it pays to have those stop losses in place. There are people every single day right now getting margin called, ruining their life because they didn’t use stop losses.

10:18
There are people every day right now in the stock market with this selling. That will never trade stocks again. They will call the market rigged, when in reality it was a lack of discipline that ultimately doomed them. Using stop losses puts you in a position.

10:35
To respond to market changes. The reason why I was able to get short this month was because my stop losses to the long side worked and it indicated to me, Ryan, something’s changing in this market. Look at the charts. I look at the charts, it’s bearish. Just for those wondering, I look at the charts multiple times a day, but I’m just kind of giving you a general understanding.

10:56
When you’re looking at the charts and you’re seeing yourself get stopped out and you’re seeing the markets turn bearish, what does that tell you? Get short. I got short, I made a lot of profits off it. I didn’t go into the month expecting to be net short, but I was. So the stock losses actually helped and aided me in understanding better what this market was trying to do and to get short on it and allowed me to take advantage of the market weakness while there was still opportunity.

11:21
After the market sells off 11%, that’s not the time to go get short. It’s time to let it bounce and short the bounce thereafter. Number 5, aggressively book gains on the bounces. Look, we don’t know how long these bounces are going to last for. Most of the time they’re temporary. Meaning that they’ll eventually be a dead cat bounce.

11:38
You have to let this market sell-off reach its true end and along the way, there’s going to be dead cat bounces and you can’t just sell yourself out to the idea that it’s going straight back up to all-time highs every time you get a green candle.

11:50
Number 6, trade fewer positions. I talked about how patience pays, but trade fewer positions that will give you less emotion in the market. It doesn’t mean you can’t still profit. Maybe you’re not profiting as much as you’d like, but when the market’s selling off each and every day and if you’re able to trade with less positions, but give yourself a clearer head to be able to.

12:11
Take advantage of the bearish conditions that the market’s presenting. That’s a good thing. You’re making money when the stock market’s going down. One of the things that I do is I provide swingtradingthestockmarket.com for all the podcast listeners. It’s something that you’ve got to check out. You get all of my market research there each and every day.

12:28
I’m gonna send it out to you. You’re going to get my. Weekly master watch list, both long and short, you’re going to get the stocks that I’m watching each and every day, plus the most interesting charts that I come across and updates on all the Fang stocks and the S&P 500, NASDAQ and Russell 2000.

12:43
So make sure you’re checking out swingtradingthestockmarket.com and in the process you’re supporting this podcast to continue to grow and build its audience. Number 7, the first dip ain’t it. We get so excited when the market sells off and we get that first big face ripping rally like, oh this is it, this is the bottom, this is the bottom.

13:02
No man, that is not it. I can tell you just from the history of trying to catch the following knife when I was younger, it usually proves to be a very, very futile exercise and one that I know from personal experience, lost way too much money trying to always be the hero and catch.

13:17
The bottom of the market. Let the market bounce. If it wants to follow through, maybe play with one new long position or two new long positions. But don’t think that you gotta get right in at the very bottom because most of the time you’re going to be catching false bottoms.

13:39
Number 8. Target bounces off of key support levels, man, we just see like stocks, they’re in complete free fall and we say, oh man, this stock is out on sale. I’m gonna buy it right now, but it’s not off of any key support level to where if the bounce fails, you’ll know that it’s failing. Instead try to target key support levels that it’s bouncing off of that way if that key support level fails, it’s easy to understand that it’s failing because it’s breaking below a key support level and you realize, OK, that bounce ain’t added either.

13:58
Number 9, avoid shorting overextended markets. And the S&P 500 was breaking the October 2021 lows. A lot of people that probably started shorting the markets like, oh man, this is a massive new lower low man, the market already just dropped 11%. What are you shorting at this point for?

14:13
You can’t. Instead, use the Descat bounces back to key resistance levels to get short. That’s where you want to get short at, not at incredible lows where conditions are oversold. Panic is starting to play itself out.

14:30
No, you’re setting yourself up for a massive face ripper that you could have easily avoided or even gotten along on if you would have just shown a little bit more patience. So wait, wait for these deca bounces to play themselves out, getting into resistance and then start falling apart again before you get short on the market.

14:46
Remember too, when you’re short the market, it’s good to tell yourself if you’re short stock ABC at 100. It’s not gonna go to zero in most cases, especially if it’s a value stock or if it’s a stock that is very profitable. It’s like say an Apple, for instance, oh, I’m just gonna keep writing it down lower.

15:04
Well, be careful because the lower a stock drops, that 1% of profits that you might make off of it is actually less than 1%. So for instance, you short stock ABC at 100% and it goes all the way down to 75%, right? Yes, you’re up 25% and that’s great, but if it drops 1% from 75%, it’s only dropped 75 cents.

15:24
That’s only like 3/4 of a% from your original position. So your sell-offs are actually getting smaller and smaller each and every day that you stay in it, and it’s helpful to remember that the stock is not necessarily going to zero in a bear market, especially if it’s very profitable company and most companies in general will hang in there.

15:43
So. These are 10 lessons that came to mind that I think has been very helpful in this particular sell-off. I would probably say one of the biggest ones obviously is using stop losses and knowing where you’re going to get out before you ever get into a trade, especially if that trade does not go well, being aggressive with the profits to the long side, and to just trade less, trade less, don’t feel like you have to trade each and every day.

16:06
Wait for the opportunities to come because it’s the patience that will pay at the end. If you enjoyed this episode. I encourage you to leave me a five-star review. Those things really, really help out quite a bit in the grand scheme of things. Also reminder to check out swingtradingthestockmarket.com and it keep sending me all your questions, ryan@shareplanner.com.

16:26
I do read them all and I do try to answer every single one that I get. If you’re one that has not had yours answered in the past, you send it again. I might have just missed it. Again, that’s ryan@shareplanner.com. Thank you guys. Stay safe out there. God bless.

16:42
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17:00
So go ahead, sign up by going to shareplanner.com/tradingblock. That’s www.shareplanner.com/trading-block, and follow me on SharePlanner’s Twitter, Instagram, and Facebook where I provide unique market and trading information every day. If you have any questions, please feel free to email me at ryan@shareplanner.com.

17:21
All the best to you and I look forward to trading with you soon.