Struggling with Tight Risk | Podcast Episode #257

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 today’s episode is one of those episodes. I just have a feeling that it’s gonna be a good one, that you’re gonna learn something from it.

0:40
I like the whiskey that I’m going to be reviewing, so let’s just go ahead and get started with today’s email. We got a guy we’re gonna call him Willy for a good old Florida redneck name. He writes, All right, keep up the excellent and helpful work. I’ll keep it short and sweet today, but I’m having some difficulty with risk management on breakout setups.

1:00
I have the TA down pat. He’s talking about technical analysis, but I can’t ever seem to buy the breakout and set up a stop loss less than 5% or so. I find the typical near support or sensible stop loss position that puts me at about 8 to 12% risk.

1:15
This often works fine from a reward to risk standpoint, putting my potential gain between 20 and 30% with a profit target at the nearest trend line or resistance, but when I have a string of losses or losing trades of 8 to 12%. It is a lot to lose.

1:31
I typically only risk 1% of my overall portfolio portrayed, which is how I set my positions and I keep my emotions at bay. So, my question is this. How do you insure a good entry price with the least amount of risk possible without missing the move altogether? I feel like sometimes I wait for a retest that never happens and miss the trade or commit to going along with risk that’s greater than I want it to be, even though it fits a healthy RR.

1:57
Do you always wait for a retest after a breakout to go long in order to get the lowest possible entry price? How often do you see a stock run from a breakout without ever retesting? Maybe I just need to choose lower beta stocks. Anyways, all the best, Willie. Then Willie follows up with another email and he says, follow up on the previous email.

2:16
Example, I feel like NIO may be a current setup with the potential to see 30. My entry price would be near 21 with what I feel like is a responsible stop loss just below 18. That is a potential of over 40%, but that puts my risk at about 15%. I tend to take these trades still, but With very small positions, seeing they provide a decent reward to risk.

2:38
Am I fishing for an unrealistic reward or risk, or should I just be passing on these setups altogether? Thanks again, Willie. OK, this is a really good question because I think a lot of traders struggle with this and they’re trying to get the tightest stop losses, but they also fall in love with certain setups and they all of a sudden find themselves going with the setups that they fall in love with, but don’t offer a very good way to manage the risks.

3:01
So we’re gonna get to all of that in this email. But first, what am I drinking? Well, for some of you long time listeners of this podcast, you know that I’m a big fan. Of old Scout, particularly as it pertains to being an everyday sipper. I rated it at 8.6 back in episode 177, really, really good bourbon.

3:21
But then I was at Total Wine the other day and I found this total wine old scout. bourbon whiskey. I read the label on the back and it made very little sense to me. So I don’t have a lot to work with or what the whole story is behind it, but it’s a much higher proof. The proof on this thing is like 119.6%, so that makes it a 59.3% alcohol percentage.

3:42
It’s been aged 5 years, and it’s a straight bourbon whiskey. Now, from a color standpoint, it looks beautiful, it’s very dark, but it’s quite clear still nonetheless. And to the nose, I mean, it has like a grape smell to it, which is nice. I like the fruity flavors when it comes to the smell, and then to the taste, it’s very chocolatey, very chocolatey, but what’s crazy about it is how strong that spice comes in at the end, but it’s not one of those spice tastes that just completely overwhelms you and you’re like, oh my gosh, what am I tasting here?

4:10
No. It’s very flavorful. The spice is very flavorful, it complements the chocolate very well, and it’s worth saying the spice tastes and feels really, really well. But the only thing I’d probably say about this one is that it doesn’t quite Let you enjoy the chocolate long enough.

4:28
I mean, it’s still is there as you’re tasting with that spice supersedes it by a long shot, so you don’t get to enjoy it for too long, but even the spice is still very good. I’m rating this one at 8.8. It’s really good, it’s better than the other old scout that I really love. Now, would I consider this an everyday sipper?

4:44
No. I mean, this thing’s carrying 60% in terms of alcohol percentage. I mean, you drink this stuff every day, you’re going to probably combust at some point. But no, in all seriousness, I don’t consider it an everyday sipper. It’s a little bit high on the price point. I think I paid like $55 or so for it.

5:00
But the other thing too, like I said, the high proof kind of makes it to where you don’t want to be drinking it every day, but is it a weekend sipper? Absolutely. It’s a good sipper. I mean, I like it a lot. Old scout total wine edition. I guess they say it’s hand selected. I give it an 8.8. I don’t know what they’re doing differently, but it does taste very, very good.

5:20
All right, back to Big Willie. So he actually answers a lot of his own questions in this email and it’s kind of hilarious. I don’t know if he realizes that he did that or not, but he does. I mean, he actually provides the answers to his own question, but I’m going to expand on some of the stuff that he says. One of the big things that he talks about is like, hey, I get into these trades and I’m risking 8 to 12%.

5:40
I’d like to be able to get to trades that I’m risking 5%, can’t really do that. So I find myself taking on bigger risk setups for a higher reward. Now, I could do the same thing too. For instance, I like to have my risk parameters somewhere between 3 and 5%.

5:56
And I would say almost on every trade that I take that’s usually right around that area there. Now, I could go for something. I mean, you saw in the later parts of his email or in the second email, he talked about using Neo NIO for a trade and he’s taking on like a 15% risk on the trade.

6:12
So yeah, if he wants a 2 to 1, he needs 30%. If he wants 3 to 1, he needs 45%. Is it unrealistic? I mean, in the current market that we’re in in 2022, you can get some dead cat bounces that yeah, stocks could rally 30, 40% within a couple of weeks. That’s very possible considering how much the market has sold off.

6:30
Is that necessarily the right approach to take with the trade? I mean, if the trade will take you that high and you can stay in it that long while still remaining disciplined, that’s great, but I don’t know if that should be our aim as traders trying to hit these big home runs every time we step up the bat. And let me tell you, 15% is high risk and I could take those kinds of trade.

6:47
To, I don’t want to take them. I like to have full positions when I make a trade. I don’t like half positions or a quarter position to start off the trade because then when I try to trim profits on those trades, what are we doing this for? Then I’m not hardly even like securing much in terms of profits when I’m going into it already with a half a trade, and then I’m going to take half of that.

7:03
I’m already down to a quarter trade after the first move that stock makes. So I like to go in with a full trade, so that’s why I’m always looking for these 4 to 5% stop losses because think about it. If my average stop loss is 4%, that means I only need a 12% rally to be able to make 3 times the amount than what I risk.

7:22
So many times we’re looking at, well, I can risk 15% and think maybe I can get 45%, but let me tell you, it’s a lot harder to get to 45% than it is to 12%. And people get enraptured by the idea of 45%, but when you think about it in terms of reward to risk, we’re wanting to be consistent traders of being profitable from one trade to the next.

7:43
Yes, we’re gonna have losers along the way. We’re going to keep them within our risk parameters. But if you’re consistent with keeping the risk tight and when you’re profitable, you’re making 2 or 3 to 1 to what you’re risking, guys, you’re not gonna care anymore about whether or not you’re in a setup that could go up 45% because you realize the profits are on how you manage the risk, how tight you keep the stop losses, because then.

8:07
Those 8 to 12% winners, they’re going to do so much better for you in the long term than trying to hit the 45% winner here and there. And then you’re going to take on more 15% losses because most stocks won’t go up 45% for you. Because remember this, it’s a lot easier for a stock to go down 15% than it is for it to go up 45% in most cases.

8:26
It’s a shorter path to 15%. Than it is to 45% to the upside, and that 15% is gonna hit a whole lot harder. And if you’re going to base your position size off of managing risks, so it’s not any different than if you use the 5% stop loss, why not just focus on trades that are going to be able to keep you at a full position, but at like a 5% stop loss or a 4% stop loss.

8:48
And then he runs into the problem to where if he’s taking these, you know, 10 to 15% stop losses on every one of his trades and he has like a string of 7 or 8 trades in a row that he loses money on, yeah, that’s gonna start to hurt some. I can lose 10 times in a row and it really won’t make that big of a dent in my portfolio.

9:05
Yes, I mean, after 10 times, it probably gets a little bit old and I’m starting to see a little bit of a difference in the portfolio, but is it something that I can come back from fairly quickly? Yeah, and oftentimes I can come back from it within like 2 or 3 trades. If I have a string of like 4 trades that have gone bad and I had it in May.

9:23
In May, I had 4 trades that I was stopped out on in a row. My next two trades, I made all of that back up. In fact, I made it back up on the first trade and then the second trade was just a little bit of an icing on the cake. But that’s the benefit of keeping your risk really tight.

9:39
Sometimes we want to have a wide stop us so that we’re not wrong, but being wrong is part of trading, but how you’re wrong is what’s going to determine your profitability. So you hear his whole email and then at the very end of his email, Willie says, maybe I just need to choose the word beta stocks. That’s probably a good starting point.

9:55
Most of my trades, I would probably say 60% of my trades are the likes of like your Apples, your Adobes, your Nvidia, your caterpillars. Bank of America, JPM, your large cap stocks, yes, they can have some pretty big movement.

10:11
I don’t trade like Walmart that much or some of your stocks that might have a beta below one, but I do like to trade the stocks with a beta over one. But I don’t necessarily want to trade a lucid or an NIO or a GameStop every time I make a trade.

10:27
Yes, there will be times where I make a trade on a stock that has a higher beta, but that’s because it’s one of those opportunities where it sets up in such a way that I can manage the risk, keep the risk tight, and if I’m right on the trade, I’m really going to be right. A perfect example of that was SPCE Virgin Galactic.

10:45
It was a couple of years ago, but I had that trade go up like 90% at one point, and I probably only had like a 4 or 5% stop loss. I don’t remember what it is, but judging by how I always keep my risk very tight, I would probably say that, yeah, it was a 4 to 5% stop loss and I made like 90%.

11:01
So I mean, What are we talking about here, like 18 to 1 reward to risk ratio. So that was a fun trade, but those don’t happen every time. Instead, I’m usually focused more on the, OK, can I get like a 12% return while risking 4%, or can I get a 9% return risking 3%?

11:20
Those are the kinds of trades that I just crave and that’s what’s really the thing that makes up most of my profits are those consistent. Winners to where I’m tripling, doubling or tripling or even quadrupling a tight stop loss of like 3 or 4%. Yes, sometimes I’ll have a big winner, but that’s not really the difference maker.

11:37
The difference maker is just being consistent. So, in most cases, yes, I have to trade a lot of your S&P 500 stocks, your Dow stocks, your NASDAQ 100 stocks. You don’t see as many Russell 2000 stocks. But why does most people trade the smaller cap stocks anyways?

11:55
It’s because they think there’s more profit in them, so they want something that has a lot of volatility. It’s like, I remember some clown talking to me onto Twitz and literally he’s a clown, but it was revolving. Around DWAC and I know there’s political hysteria that revolves around that stock. I don’t look at DWAC from a political standpoint at all.

12:13
I’m just telling you, it’s a stock I would never want to own, not because I fall on this side of the aisle or that side of the aisle. It just has a horrible chart to it. In the risk aspect, the headline risk aspect, it makes it very unmanageable, but this guy, uh, he probably has only been trading for like 2 weeks or something and he says, Ryan, he’s like, where else can you find a stock that goes up $5 or $6 a day or 15 or 20% in either direction.

12:35
I like, that’s all the more reason not to trade that stock. I can probably guarantee you I’ll never trade DWAC unless it actually makes it really big at some point in the future, but I’ve traded Twitter plenty of times. I’ve traded Facebook plenty of times. What’s the difference between the, the three of those? Well, Twitter and Facebook are much more established in terms of there’s more coverage on them.

12:54
They all have a much bigger market cap, the volatility and the beta is lower. So DWAC’s probably suck, I’ll never trade. I mean, I can make comments on it all day, but I’m not going to try to short it or go long on it because you can’t manage the risk in an effective way. And I don’t want to wake up one day being 40% down on a trade.

13:11
Because I thought it was gonna go up or down and I positioned myself accordingly, and instead I was wrong. I don’t like to be wrong big on a trade, and yes, I am wrong on trades all the time. In fact, I would say on most of my trades, and some people think that this is like, you know, a horrible take on my trading, but I expect to lose on every one of my trades.

13:30
I usually have a very pessimistic outlook on my trades and when I’m right, I’m like, oh, look at that. I’m right. It worked. Great. That it happens twice or 3 times in a row, and then usually I’m surprised by the times where that happens as well. But nonetheless, I’m very cognizant of what can go wrong on a trade, and I very much prepare myself accordingly.

13:53
So, you know, you trade stocks like NIO and I’ve traded NIO before, can’t remember if it was profitable or not because it, you know, like most symbols, you know, it’s just kind of goes on to the. As sheep of my trading history, but I can tell you that’s not one of the trades that I’ve traded more than others.

14:09
It’s probably been traded like once or twice. And a lot of your higher beta stocks, they’re the ones that I trade the least amount. It’s not that I oppose them, but the trade setup needs to be right. What Willie’s doing here is he’s focusing only on those stocks. It’s OK to trade a lower beta stock.

14:24
Apple can provide great returns. Bank of America can provide great returns. What you want to focus on is the trade setups. Is this a trade setup that actually provides a legitimate opportunity to the upside. If you can put a stop loss on a trade of 1% and it sets up correctly and you can make 3%, you still just make 3 to 1 for what you risked.

14:45
That’s still very, very good, and that’s what’s gonna keep you in the game long term. I think most traders fail to realize that that it comes down to the reward to risk ratio. If I’m risking 25% to be able to make 20%, yeah, when I make 20%, it’s going to feel good, but that 25%, even if I’m right 51% or 52% of the time, I’m still going to be a losing trader.

15:06
Yeah, I could have some amazing 20% trades, but if my reward is not as much as my risk, yeah, it’s gonna suck. And if my reward to risk ratio is 1 to 1, I’m still gonna lose. He also asks about waiting for stocks to retest the breakout level, and yes, a lot of times stocks will retest their breakout level.

15:23
Every time, no. But if you missed the breakout, and this is usually what I use the, the retest of the breakout level for, I’m doing that because I don’t want to chase after it. I’d rather roll the dice on whether or not maybe it comes back down to the breakout level, holds the breakout level, and makes the next move higher.

15:40
In fact, as part of swingtradingthestockmarket.com, I posted a chart showing a potential setup down the road of a stock. I think it was RBLX, but it had a, a base breakout, but it’s already made a decent sized run. And so I don’t want to buy it when it’s already run like 15, 20% and then expect that it’s going to keep on running after it breaks out and there’s no real good place to put the stop loss.

16:02
I’d rather let it break out and then try to play the pullback because when it pulls back and then it bounces, then you could put a stop loss below that pullback low and then play the bounce thereafter. But yeah, I mean, Plenty of times I will do that, or I’ll also just get in right away on the breakout itself.

16:18
And yes, maybe I get stuck in a pull back to the breakout level where I get stopped out, but there’s plenty of times where I just go ahead and play the breakout and I do just fine doing that because the reward risk ratio is right. I’m able to keep my losses tight enough to suit my goals in the end.

16:34
And he also mentions about missing out on a move altogether when he sees a stock run without him. Don’t worry about it if a stock moves without you. I would probably say I come across like, in most cases, I will come across 8 or 9 trade setups a day that I like and I’m lucky if I take even one of them. Because the market conditions have to be right.

16:51
So just because you have a good trade setup doesn’t necessarily mean you should take it. It needs to be in conjunction with market direction and how everything else is setting up, meaning like sectors and industries as well. But it seems like Willie here, he’s chasing a lot of trade setups that they might have a good reward to risk ratio.

17:07
Yeah, maybe they can run up 40%, but it’s gonna be a lot harder to get to that 40% level than it would be just seeking after a lower beta stock that has like a 4% stop offs, but there’s a 12% opportunity. But again, we’re talking about Willie answering his own questions. He says, I feel like sometimes I wait for a retest that never happens and I miss the trade or commit to going along with the risk that is greater than what I want it to be, even though it fits a healthy RR.

17:30
Well then, I mean, I can find stocks all the time, that’s high beta stocks that have a 3 or 4 to 1 reward to risk ratio, but the risk is so much I’m not willing to take it. And so, Big Willie here, he’s trading beyond what his tolerance is for risk, in my opinion, at least. Also, I always forget to plug wing trade in the stock market like somewhere in the middle of the podcast, so, but any case, swing trade in the stock market, that is the website that goes along with this podcast.

17:54
It provides you with all my stock market research each and every day. That’s going to include my weekly watch lists, both bullish and bearish. That’s going to do anything. Include setups that I’m looking at each and every day as well as the most intriguing charts and updates on all the main stocks plus Microsoft and Tesla and updates on the indices.

18:11
So check that out. swingtradingthestockmarket.com. You’re supporting the podcast and make sure that you are leaving me 5 star reviews. If you’re new to this podcast, it really makes a difference. And if you haven’t done so yet and you’ve listened to all these or even a majority of these, what are you waiting for? Do me a favor here. And make sure to keep sending me your questions, Ryan at shareplanner.com.

18:30
I do read them all and I love reading them actually. And it, it makes me a better trader and it makes me better at providing you guys with the best and latest information when I know what you guys are thinking and ask. So, as always, thank you for listening and God bless. Thanks for listening to my podcast Swing Trading the stock market.

18:48
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19:06
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19:23
All the best to you and I look forward to trading with you soon.