Getting Stop Out The Same Day | Podcast Episode #229

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 have got a good show for you guys today. I have an email from an individual who is struggling in this very volatile and quite bearish market over the course of 2022 so far.

0:45
We’re two months into the new calendar year, and he’s struggling with Getting stocked out the same day because the volatility is so big and if he wants to keep his stock loss tight, he’s faced with the possibility that as soon as I get in, the market might reverse, go up 3%. My stock might have more beta than the market, and I get stopped out for a 4% loss.

1:05
So it’s a real struggle for a lot of traders right now. I know I’ve had this problem in the past myself, so we’re going to get into all of that here today as well as some personal experiences. And the redneck name that I’m giving this person will be Gretchen because I don’t use their actual real names because most of the time people don’t like that.

1:22
So we’ll give this person a redneck name of Gretchen and Gretchen writes, Hi Ryan, I’m fairly new to trading. I’ve started paper trading about 6 months ago and did consistently well. So around January 1st, I decided to make the jump into live trading. It would seem like I timed my trading debut about as poorly as you could.

1:40
I guess a trial by fire will be a great learning experience. I am starting out with a small account around $2000 small enough to where if I blow it up somehow it won’t kill me, but large enough to care about my trades. These 1st 2 months have been nothing short of insane compared to the last 6 I’ve been paper trading.

1:59
I’ve listened to your podcast about 2 months ago from episode 1 and finished your most recent one yesterday. The information you provide has totally shaped the way that I trade and is the reason why I am positive these last 2 months. Well, Gretchen, if you’re positive these last 2 months, that’s a good thing.

2:16
Yes, you started live trading in a very difficult environment, but if you’re Positive in this market environment, you’re doing better than like 99.9% of traders probably. He says it’s not much in terms of profits, but hey, at least I’m not in the red. I keep my stops around 4% or lower if I can and try to find entry points at key support.

2:37
And resistance levels. I try to stay with stocks with a beta of less than 2. My main problem has become with volatility of the current market in order to keep my stocks tight, I am getting stomped out the same day more than I’d like. As you know, this can be a big problem with less than $25,000 into your account.

3:01
This is the pattern day trader flag that you’ll get in your account if you do more than 3 day trades within a 5 day period. They’ll start limiting your account in terms of being able to get in and get out the same day, which, by the way, is totally wrong. I mean, who is the government to say, hey, you can’t do more than 3 day trades in a week?

3:18
Oh, but Mr. rich guy over there, yes, you can do that. I mean, it’s the biggest farce like. The government, for wanting to be a champion of middle and lower incomes, my gosh, they do pretty much everything they can to limit what you can do. It’s like you’re not smart enough with your money, but hey, the government that’s $30 trillion in freaking debt can tell you how you should better manage your money.

3:38
Oh, get lost. All right, I’m not gonna go on a tangent right now. It does bother me that the government writes these rules. I mean, even for like hedge funds right now, right? You have to be an accredited investor, which is, I think you have to have like a net worth of more than a million dollars. Now they’re trying to raise that, or at least some people are proposing that you raise it to $10 million.

3:58
Like, what are you talking about, man? If a person with $10 wants to invest in a hedge fund and that hedge fund will accept their $10 they should be allowed to invest in that hedge fund. Now I gotta figure out where I’m at on this email here. Oh, here I am, OK. I have recently have started trying a new strategy to avoid this.

4:16
I still use the same metrics for entry and stops, but I have been buying at the end of the trading day and then selling the next morning during the opening jumps. Usually don’t make. Much money the first hour, but this strategy has been working out quite well the last week or so. Sort of a mixed swing trading day trading scalping style.

4:34
My long winded question is, do you think this is a strategy that is sustainable, at least until the market volatility calms down or even pass them? I do use stops every single time. Thanks for all of the great content. I listen to every podcast.

4:49
Also, thanks for turning me on to Old Scout. It’s my new go to Bourbon. Congrats on getting married and take care, Gretchen. Yes, Old Scout, by the way, is a great go to bourbon, fairly priced and widely available and extremely tasty.

5:05
But that’s not what I’m drinking tonight. What am I drinking? Drinking heaven’s door, Tennessee bourbon, whiskey. Now, I haven’t been impressed with too many of these heaven’s doors whiskeys here. This is my 3rd 1 that I’ll have reviewed. Into the nose, it smells like rubbing alcohol, man.

5:20
I hate that smell. I mean, there’s nothing flavorful to the nose. And when you try it, It’s very bland, very flat, very unflattering. It’s hot. It’s spicy. I don’t even call it spicy, it’s just hot. It’s, it just doesn’t taste good.

5:37
The finish comes in even hotter and it keeps the same blandness, maybe even gets more bland as you taste it. I don’t know if that’s even possible, honestly, but it’s just not that good. I mean, can you get through a drink if somebody handed it to you? Yeah, you could get through it. It’s not like some of the more horrible like peanut butter whiskeys that I’ve tried in the past, but it’s still not that good.

5:59
I give it a 4.7. This is probably the worst of the heaven’s doors that I’ve tried so far. The other two was the double barrel and the whiskey right. I get both of those 5 7s, so this one’s a 47, it’s worse than both of them. OK, but now back to the podcast here because Gretchen has some important questions to have answered.

6:18
And so he, he started taking about 6 months to learn the basic trading mechanics and just learn the ebbs and flows of the stock market as a whole. He did consistently well with paper trading and most people do because there’s not that emotional attachment to your trades.

6:34
You can be very emotionless and you don’t worry too much if you have a losing trade because it wasn’t real money. It’s like basically playing a game of Monopoly and if you lose, you just go on with your day. So, Once you go into real trading, live trading, where you get the money, that’s where all the emotions come.

6:49
That’s where people start making bad mistakes because they’re worried about losing their money. And once you close out a losing trade, there’s not like you can get a refund or anything. Now he says he’s learning trial by fire and it’ll be a great learning experience. And yes, I think it’s really good for a lot of people to be learning to trade in this environment versus right after 2020 when the market does seemed like a casino that always paid out.

7:12
In 2020, the market kept going higher and higher and higher and everybody just thought that’s how the market works. You could get these 2 and 3% up dayss almost every day and you’d make just Barrelfuls of money without any regard to risk. Now the tide has changed. It’s changed from 2021 and it’s changed from 2020 to where it’s a much more risky market to the downside.

7:31
People are seeing stocks that they held, like let’s say Square, losing over half of its value. PayPal, the same thing. Facebook has lost $500 billion in market cap as of this past month. So all these stocks where they thought I was like, just buy and hold and it’ll eventually come back.

7:49
They’re starting to realize maybe the stock isn’t gonna come back and there’s plenty of stocks trading right now that have been beaten down severely over the past 4 and 5 months that will never see all-time highs again. When you go back to the top com bubble, there’s a lot of stocks that blew up and never came back.

8:07
But I like the balance here of what he’s doing. He’s trading not too much money, but enough money to where he cares about the trades and doesn’t want to blow up his account. But if he did blow up his account, it wouldn’t kill him. And that’s a good starting point. That means that you’re probably trading about the right size for based off of your experience and your knowledge on the stock market.

8:26
So it’s enough to learn off of, to experience those emotions and those thoughts that run through your mind when you’re trading with your own money, but it’s not going to kill you if you or when you mess up. Because a lot of times people go in way too big. If they have $100,000 sitting in their account, they’ve never placed a trade in their life.

8:43
They put all $100,000 in there in the first trade, they put like $60,000 or something on the first trade and then $60,000 on the next and going on $20,000 in the margin. And so, taking a measured approach to learning the stock market and, and trying to get better at it can be accelerated by trading a smaller account and building up to those larger accounts.

9:05
Yes, if he’s gets really comfortable with it, yeah, you can add more money to it. But he doesn’t need to go too crazy. He wants to make sure that as he incrementally increases it, that he can emotionally handle the larger sums of money that he’s trading. So don’t go to like 0 to 100 MPH just because you do good with $2000 doesn’t necessarily mean that you’re ready to trade with like a $100,000 position.

9:28
And he leads me on to think that he’s having like this horrible year, but then he says he’s positive in the last two months and that’s huge. If you can be positive in this market environment, and let’s just be honest, like if you can just survive this market environment, you’re going places. So I like the idea that he’s actually able to show some profits during this time.

9:46
It shows that he is managing the risk and he goes on to tell you how he’s managing the risk. But the funny thing is, he says, hey, it’s not much that I’m profitable. Well, granted, you’re trading with a $2000 account and you’re probably not gonna make a ton of money. But he says, at least I’m not in the red, but guess what?

10:02
I bet you Warren Buffett’s down right now. That doesn’t make us necessarily better than Warren Buffett. I mean, the dude’s like trading way more money than we could ever wrap our minds around. But at the end of the day, would he rather be standing there with the profit that you have or the maybe millions or billions of dollars that he’s lost so far here in 2022?

10:18
Even if it was a buck, I think he’d rather have the buck than a major loss. That just makes sense. So he keeps the stock losses below 4%, and he tries to trade with stocks that have a beta of less than 2. For those who don’t know what a beta is as it’s measured with a stock, the stock market goes up 1% in a given day, a stock with a beta of 2 goes up 2%, stock with a beta 3 goes up 3%.

10:40
If it has a beta of 1.5%. Then it has goes up 1.5%. Same thing if the market goes down, whatever the beta is, if it’s 2, it’s gonna go down in the stock market goes down 1%, the beta of 2 means the stock goes down 2% on average. It doesn’t mean it’s going to be like that every single day, but on average, so that’s the important thing to remember.

11:00
So by keeping it under 2, he’s trying to keep the volatility at base, trying to make sure that he’s not trading too risky of stocks. And usually for me, I, I usually like to trade stocks with bettas between 1 and 2 as well. I don’t like to get into some really slow moving stock like below 1, because then if the market takes off, there’s a good chance that you’re not gonna be matching the returns at all.

11:21
But the gist of all of this is that he’s getting stomped out the same day more than he’d prefer to be stopped out. Now, what do you do about that? Well, for me, like right now, I’m doing a lot of shorting in the market. Most of it’s being done through ETFs, inverse ETFs, in fact, uh, 2 to 13 to 11 to 1, inverse of the S&P 500, the Russell 2000, and the NASDAQ.

11:44
So. I’m not doing really any 3 to 1s just because the risk in those are so much more difficult to control. And if the market, you know, rallies against you for like 1%, all of a sudden you’re down 3% on that stock. That’s kind of a hard one to stomach. I’ve been doing a lot of twos and I’ve been doing a lot of ones, but him and I have probably similar risk profiles in the sense that I don’t like to take losses of more than like 4 to 6% on a trade.

12:08
So. Most of the time, the ultras are not going to work good for me if it’s like a 3 to 1 now. 2 to 1, a lot of times I can work with that, but when it starts to get into the 3 to 1s, it’s very, very difficult to find quality stop losses. But even still, if you’re trading a utility company, it’s still very easy to get stopped out with this high level of volatility.

12:27
So you have to really pick and choose your moments that you’re going to get short. Oftentimes that, you know, means waiting for a market bounce to Run its course and start to, to fall back again before you start getting short, not trying to just jump in front of a freight train that it’s steamrolling higher.

12:42
You got to wait for that pullback to start before getting short. And even then, you can still get stopped out. Now, I had a similar situation like that today where QID, which is the 2 to 1 inverse of QQQ or the NASDAQ 100, I got long on that.

12:59
So I was looking for the market to go down and the NASDAQ to go down, so the QID position would go up. And so I got in at like 1969, and then it goes all the way up into the 20s and then there was this headline that popped and a surge of volume came out and it goes from like 20 back down to 1973 or so.

13:18
And I had to get out. One of the main reasons was because there was massive amounts of volume that was coming in. It was coming in at a new low of the day that had just been formed. And I wasn’t just gonna sit there and just watch a position that was up, you know, 1.5, 2% just completely get steamrolled the rest of the day because we’ve seen that happen many, many times.

13:34
So I get out, I got out for like a 0.2% profit. Later in the day, there was a bull flag forming on QQQ. Therefore, it’s more like a bull flag on QID. So I get long on QID and I hope I’m not confusing you guys. Just remember, QID is the 2 to 1 in verse of QQQ, but I get long on QID at 1991.

13:55
Do I wish I had not. Jumped out of that position. Well, I wish the market didn’t force my hand to get out of it because I didn’t know for sure if I was just going to go see another 4% stop loss because there was a headline that hit the news. I’d rather be safe than sorry. So I went ahead and got out for a small profit, reloaded later, got back in at 1992, which is higher than where I originally got in, I know, but sometimes you got to do that just to be able to manage the risk.

14:19
But in this market, it’s best to put those stop bosses above critical resistance levels or below critical support levels. And that will help you avoid some of those stop losses. Now, you can’t do it entirely, so it’s very, very important that you’re not trading just to be trading, but you’re waiting and waiting and waiting until you get some really good trade setups.

14:39
I have been trading less this year than I have ever before. December was also a very low volume day, but in these markets, I don’t need to be trading a full 100% of my portfolio. Instead, in this environment, I’m trading 10 to 20% of my portfolio at a time. I don’t need to be 100% vested in any Direction at this moment.

14:58
So now he’s created a new trading strategy for himself where he’s buying right at the close and selling at the open. There’s a lot of people that’s been doing that for a long time. Now you’re going to have gaps down. That’s just a matter of fact, we’ve seen plenty of them over time. But the reason why a lot of people trade the strategy is that if you’d like take the last 10 years of the stock market.

15:19
Almost all the gains have come from overnight trading, so that would entail buying right at the close, selling right at the open. That doesn’t mean you’re not gonna have gap downs or significant gap downs. It’s just saying that long term you’re going to make most of your money by holding a stock overnight. So that’s kind of like what Gretchen is trying to do here.

15:37
The question is, OK, if you’re going to do it long term, one, does it work? Well, statistically speaking, it is supposed to work, but two, are you going to be able to have the discipline to to sell at the open every day, or are you going to get a gap down and you’re trying to see if it’s going to rally back some before you get out, only to see it drop back further before you can get out.

15:54
So there’s a lot of discipline issues there that you want to make sure you work through. But I also think too that it’s important that you don’t abandon your regular swing trading strategy. Yes, it’s gonna be more difficult in a market like this, but start to understand, OK, what is not working for me and what do I need to do to change and make it better because you want to have that experience of trading through this time.

16:15
So whether or not you decide to keep doing the buy at the close, sell at the open strategy, the bigger question is, is, are you going to continue to learn swing trading? As you ultimately want to do during a very difficult market circumstance because it’s these circumstances that are going to help define you as a trader.

16:33
The other question that I would probably say is OK. That strategy probably works really good in a bullish market, but, and I don’t know the answer to this, how well does it work when the VIX is over 20 or when the VIX is over 30 because the volatility index goes way up during times of uncertainty.

16:49
How well does that strategy perform during those times? I would say in most cases it’s not performing well during the most volatile times because the swings higher and lower can be so extreme. And as it pertains to the volatility with your swing trades when you’re using like 4% stop losses, there’s a number of things that different people will use.

17:06
They might use wider stop losses, but cut their position in half. Let’s say if they wanted to use 8% stop losses, but they only want to lose the same amount of dollars as if it was a 4% stop loss, then you would cut your position size in half, right? But then all of a sudden, in order just to get a 2 to 1 return, you have to get 16% of a return on your trade instead of 8% when you use a 4% stop loss.

17:28
Remember too, in this kind of a market, I mean, there’s a reason why we’re down is because everybody’s selling the strength. So anytime you get a strong balance, that should be a reason to aggressively look at book profits, not to try to see how long you can let your winners run because in this kind of environment, the rips are getting sold.

17:44
So the takeaway from all of this, make sure if you’re implementing a new strategy in this market and you’ve heard about it working well over a long period of time, make sure it’s also a strategy that can work well during this specific market environment where you have volatility of over 20 or over. 30, that’d be a great way to start for trying to test such a strategy out.

18:01
There’s plenty of programs out there that actually does this. I think TradeStation is one of the good back testing platforms. There’s plenty of them out there. And when you’re in a very difficult and volatile market, those are the times where you want to be a more aggressive with booking profits and taking profits along the way and making sure you’re not trying to have the same glorious expectations for a stock trade as you did maybe in 2020 or 2021.

18:23
Those are just not really happening that much right now. So you’re not doing yourself any favors. When you have high expectations for a stock in a very low expectation environment. And know too that in this kind of environment, yes, you’re going to have more stop outs.

18:38
Than normal because of how quickly the market can move against anybody’s position. That’s why I’m not trading with 3 XM versus the ETFs. That’s why I’m doing 2 and 1 X ETFs. It’s also the reason too why I’m doing a lot more index moves because it’s much more difficult for us index to move 2% than it is for a stock to move 2%.

18:58
So it’s helping me. Manage the risk even more so. Another thing that you can do is Gretchen had talked about how he was trading stocks with a beta of no more than 2. He could maybe even cut that down so maybe you only trade stocks with a beta of 1 or less or 1.5 or less, and that might help you as well to not get into very volatile stocks in a very difficult market.

19:17
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19:35
If you enjoyed this episode, make sure to leave me a 5 star review. Those mean the world to me, and they do help me out quite a bit to get discovered on. Various platforms like Spotify, like Apple, and make sure to keep sending me your questions, ryan@shareplanner.com. Man, I love reading these things.

19:51
I don’t get enough of them. I really don’t, so make sure to keep sending them to me and I will read them and I’ll do everything I can to put them on air as an episode of their own. Thank you guys. Thanks for listening to my podcast Swing Trading the stock market. I’d like to encourage you to join me in the SharePlanner trading block where I navigate the stock market each day with traders from around the world.

20:12
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20:34
If you have any questions, please feel free to email me at ryan@shareplanner.com. All the best to you and I look forward to trading with you soon.