Overseas Gaps in Stock Trading | Podcast Episode #258

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 going to be a unique one because we’re gonna talk about gaps in the stock prices as a result of price action in overseas markets.

0:44
Essentially, you wake up in the morning and you find out that your stock. Is gapping higher or lower because it trades primarily on another market. So, so you take a stock like Sony or Baidu or Alibaba or China Life Insurance or the RSX which has actually been discontinued with the war in Ukraine, or you take it like BHP.

1:03
All these stocks can have gaps as a result of the price action in overseas markets. So, today’s podcast, I’m gonna give this fellow the name of Billy for a good redneck name. He says, hi Ryan, great podcast. Keep up the good work.

1:19
My question is this, you always emphasize the importance of good risk management and rightly so, but I often trade ETFs that open and close with the London market. This leaves me vulnerable to big moves in the United States and the Asian market hours where my stop loss cannot be triggered, and so I get gapped.

1:35
Well below my intended stop loss once the London market opens. How can I best mitigate this? I have tried trading in an account that allows for trading on all sessions, but sometimes I want to hold for months at a time and have to pay a daily interest fee which will eat into my profits or add to my loss, as is often the case.

1:53
Many thanks, Billy. Oh Billy, good question. Very unique question too, just like I was saying, unique question, not one that’s been asked before, but before I get to answering that question, what am I drinking here? Well, I was at the store the other day and this guy that was working the shelves was saying, Ryan, you gotta try this woolcott authentic Kentucky made bourbon.

2:13
It’s distilled by Barden 1792. The proof is 90, which makes the alcohol level 45%. Pretty cool looking bottle. Only cost me like $25. So yeah, I was curious about it. Now, to the nose, you, you definitely pick up on a lot of rye, a lot of corn smell.

2:28
It’s pretty potent. The the taste, it just feels like you’re grabbing a handful of pine nuts and eating them, and also a bit of an oaky taste. It doesn’t like stand out as being great. I think some people would like this particular kind, but on the Finished side of things, you definitely pick up on the spice. Hits you in the nose a little bit, clears the sinuses.

2:47
It’s like going to Arby’s and getting a whole bunch of those horseradish packets and just squeezing them into your mouth or putting them on the roast beef sandwich. Yeah, it kind of has that effect. It clears the sinuses pretty good. It’s not the worst one and it’s not the best one that I’ve ever had. So I would probably say on a scale of 1 to 10, I’m gonna give it a 6.3. 6.3, again, this is Wolcott, distilled by Barden 1792, 6.3.

3:11
So back to this particular question here with Billy. Anytime you have a stock that has the threat of gapping lower on you, in this case he’s trading ETFs in London, but There’s significant gaps because of the price action that let’s say in the United States. Let’s say that he’s trading an ETF on the London exchange that mirrors what the spy does.

3:30
SPY, the S&P 500 ETF here in the United States. Well, he’s gonna have significant gaps, higher and lower, especially in the kind of market that we’re in here in 2022, where if the market sells off 4 or 5%, he’s just opening up to a significant gap down. And that’s one of the things about trading stocks that are primarily listed on other exchanges is that they’re going to have a lot of volatility.

3:52
For instance, Sony, I’ve never traded Sony because of that very fact. You can have significant sell-offs, so you don’t have a chance to necessarily get out at a reasonable price when the volatility in the other market is extremely high. But this all comes down to headline risk, and I talk about headline risk a lot because obviously, stop losses is one of the best ways to manage the risk.

4:12
Planning out your trade before you ever get into it. But that can only help you so much if there’s a lot of headline risk associated with the stock, for instance, no matter how bearish I might be on a stock, if there’s rumors or the potential for a stock to get bought out, that’s a lot of headline risk because you could wake up one morning and you find out, hey, the stock just got bought out for a 60% premium, and now that short position you were in, you might even been profitable on it at the time, is now giving you a margin call.

4:38
So that’s headline risk. When we talk about managing the risk, headline risk is a major component of that because if a stock has a lot of headline risk like what a lot of Chinese stocks have right now, like Alibaba and Baidu, and a few others, it’s not worth holding that stock overnight. There’s enough risk as it pertains to trading, that if there’s known risks involved, let’s not do that.

4:57
One of the big reasons why I’m not trading a lot of individual stocks right now and I’m focusing more on the ETS is because I think that we’re at a point here coming into the earning season where we could easily see a lot of companies coming out and out of nowhere just warning about earnings guidance being very poor or that they missed.

5:17
And you don’t get any warnings. It’s not like an earnings announcement where you’re getting a heads up saying, hey, this is when our earnings are coming out. Don’t hold the stock through our earnings. No, you get an earnings warning, that just happens out of the clear blue. It’s happened to me before. It happened to me probably like 3 or 4 years ago when Apple did it.

5:33
Of all things, it was like the. First trade of the year that I had made, Apple gapped down like 7 or 8% on me and it stunk, but that kind of things can happen. The reason why I bring that up is, is that that’s a form of headline risk. trading stocks that are primarily listed on an exchange overseas has risk to them too, just like with Sony, just like with RSX, it was the ETF that followed the Russian markets.

5:56
Now, obviously, That doesn’t trade anymore. That stopped trading back on March 4th of 2022, but when it was readily available for trading, there was a lot of gaps in it overnight, and that was even more so amplified with the situation in Ukraine.

6:11
So while it may not necessarily fall under the exact title of what headline risk would mean, meaning there’s like a news piece that’s sabotaged in your trade, there is gap risk because it’s trading overseas, but you can pretty much treat it in the same kind of manner. So how can he best mitigate this?

6:27
What can he do to mitigate those risks? I would focus on the stocks that are in your exchange in the country that you trade in. I mean, there’s still going to be effects like for instance, if the Chinese markets crashed 30 or 40%. In one night. Yes, that would affect the US markets as well, but it would hurt even more so the Chinese stocks like Alibaba or Baidu.

6:47
And one way to identify is just looking at your charts. If you see a lot of gaps where it almost looks like a dot plot or something, there’s a good chance that that’s a stock that’s heavily affected. By the actions of overseas markets. And so if that’s the case, you want to stay away from it because stop losses won’t really matter as much or at least it’ll be very difficult to trigger the stop losses without a significant gap right through those prices.

7:10
And he talked about how he uses an exchange that allows them to trade throughout all sessions. I think that’s a horrible idea just because of the fact that like in his own words, he says they’re charging him interest and if he wants to hold a trade for like a month or two. He’s gonna have to pay a daily interest fee, and that really adds up that eats into your profits.

7:26
It’s just not worth it. And by the way, before I forget, don’t forget to check out swingtradingthestockmarket.com. This is the patron website that goes right alongside of this podcast. You’re gonna get all my stock market research each and every day. I mean, we’re talking about good stuff that’s gonna include updates on all the big tech stocks like Meta and Amazon and Apple, Google, Microsoft, Tesla, and Netflix.

7:50
All of those guys. Then you’re also getting my weekly watch lists, both bullish and bearish, so you know what stocks are on my radars, plus the list of daily trades that I’m looking at potentially taking, and some of the best charts that you’ll come across each and every day. So check that out, swingtradingthestockmarket.com.

8:06
I also even provide updates on the indices as well. But when you’re left vulnerable to big moves like what he just says here, he says, I’m vulnerable to big moves in the United States and Asian market hours where the stop loss cannot be triggered. One of the big things that I would tell somebody is that yes, it’s sexy to trade like the apples of the world.

8:23
It’s sexy to trade. Nvidia and some of these other companies and Amazon and Google and Microsoft, and that might not be the ideal trades to be trading over in London or in Asia or whatever markets that you find yourself in. And instead, I think it’s really good to focus on the ones that you have the least amount of headline risk with and the ones that you have the least amount of massive gaps because of the influence of foreign markets and especially if you’re having to pay fees just to be able to stay on top of them, that makes it even more difficult, but check it out, I mean.

8:52
I know we have gaps in our own markets from, you know, overnight price action, maybe it’s because of the price action in London or something that happens overseas that affects the overmarket. Like, look at what was going on with the everybody’s. Markets in their own countries when Russia invaded Ukraine.

9:07
It caused all sorts of chaos in the markets. But there’s even a more increased amount of risk when you trade a stock like Sony or LFC or BHP because they can have significant gaps and in more volatile markets, those gaps become even more profound. So this isn’t going to be a very long podcast, obviously, because it was a pretty short and to the point question that I was able to answer fairly quickly, but I’ll leave you with this as well.

9:32
And remember, when you’re in the kind of market that we’ve seen so far in 2022 where there’s just so much downside risk, look to find opportunities to reduce unnecessary risk. Yes, regardless of whether it’s a bull market or a bear market, there’s always risk, but there’s enhanced amount of risks when you’re in the kind of bear market that we’re in right now.

9:50
And if you can avoid trading certain stocks that are going to have significant above and beyond risk events. I would say avoid them. I think the more you can reduce risk, the better off you’re going to be because profits will eventually take care of themselves when you manage the risk and I’m not trying to say that you don’t have to think about profits or you don’t have to think about how are you gonna manage a winning trade.

10:13
What I’m trying to say is is that most people’s problems don’t lie with being able to pick a winning trade. Most people’s problems come from the fact that they can’t manage a losing trade. And when you can’t manage a losing trade. It’s just going to eat into all of your profitable trades.

10:29
That’s why I say if you manage the risk, the profits take care of themselves, because most people can find winning trades. The problems come and when they can’t manage their losing trades, and those losing trades just tenfold, the profits that they make on a winning trade, like if they can consistently make 5% on every one of their trades, and they can do that 19 out of 20 times, but then they let one trade come in and wipe it completely out because they never wanted to trade.

10:52
They pretty much just lost all of those gains and then some they’re like pretty much down 5%. Because they didn’t manage the risk. So, if you enjoy this episode, I encourage you to leave me a 5 star review. I do read them and I really appreciate it. Some of you guys have been leaving some recently and that does mean the world to me. It encourages me.

11:07
And keep sending me your questions, ryan@shareplanner.com. I read them. I like to put all of them on air, so keep sending them to me. Plus, sign up for swingtradingthestockmarket.com. Thank you guys. God bless. Thanks for listening to my podcast, Swing Trading the stock market.

11:24
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11:43
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.

11:59
All the best to you and I look forward to trading with you soon.