Hedging ETFs with ETFs | Podcast Episode #312

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, you can succeed at the stock market and I’m ready to show you how, hey, everybody, this is Ryan Mallory with swing trading the stock market, man, only got to do one podcast with you guys.

0:36
Last week I was hit with the covid. Still feeling kind of tired from the whole thing. A man that stuff really wears you out at times. I didn’t we have to battle symptoms. I was hitting 103 at times. I guess some ways that might be a bad thing to be dealing with and the chills and feeling hot and all that stuff, that was definitely hitting his.

0:53
Second time I’ve had at first time, I thought was a breeze, but second time is a little bit harder. But nonetheless, I mean, it was about four days or so, Tuesday, through Friday, and hit pretty hard, but I feel like I’m ready to go and get got it with a full week of trading guys. We’ve got an email today from a guy who has three good questions for me here and I’m just going to start off by reading the email, his name.

1:15
Well he talks about it in the email so we’ll go with it from there. He says, good morning writing to you from North Carolina. Thank you for your continued content and support. I emailed you before about trading inverse ETS and made a podcast about it. So thank you for that response. I was wondering if you call me Bruce Lee Roy this time it’s at first, I was like, what the heck is Bruce Leroy?

1:34
Then I eyes. It’s a play on words, you know, Bruce Lee, and then Leroy. So he’s got the best of both worlds. Man to greatest fighters of our time, Leeroy Jenkins and Bruce Lee. Also, I’m still absorbing Market updates for the Spy, the accused in the iwm on patreon that you provide any time you can throw in the vics, 30 2108 analysis is greatly appreciated.

1:53
Actually think I did that on today’s update so that’s cool. Let’s get to the questions. Do you ever hedge the long and short ETS against one another especially around CPI reports fomc meetings and job report? For example, qld vs Q ID or you PR 0 vs SDS or probably SPX you in that situation.

2:13
Number two, I’m struggling with moving up, stop bosses after I’m already profiting on the trade, I continue to get knocked out of the trades in profit then watch the ETF or stock search higher again after the pullback, how do you handle moving up the stop losses and not killing your trades.

2:29
Number three. Lastly, I’m getting to the point where I really don’t know whether to scratch my butt or wind my watch in this market. I I know you did a podcast recently called a frustrated Trader, so maybe I just need to listen to that one. But I had this question before I saw the podcast in my feet, sincerely Bruce Leroy, good question there.

2:45
And we’re going to answer all of them and this podcast. And what am I drinking in this pocket as well? I am going to be having myself some JJ Cory. It’s Irish whiskey and I’ll be drinking it throughout the podcast and then let you guys know my thoughts on it at the end of this episode.

3:03
Also, make sure that you guys are signing up for Swing Trading the Stock Market. You heard it mentioned in this email from Bruce Leroy, he signed up for it, but it’s a really great way to support the podcast and also get all my stock market research each and every day. You’re going to get updates on the big tech stocks, the market updates.

3:19
You’re going to get weekly updates on my watch list both long and short and some really good trade ideas that I come across each day. So check that out: swingtradingthestockmarket.com. So as I’m drinking this JJ Corry, hoping that it’s going to be a good one here, the number one question that he asks or the first question that he asks he says do you ever hedge the long and short ETFs against one another, especially around the CPI reports, the FOMC meetings, job reports?

3:44
No, I don’t do that. I used to actually and in fact I think if you go back far enough, I’m talking about maybe a couple hundred episodes or so, I think I actually mentioned how I was doing it at that time. I think as we develop as traders, I think we start to learn or we evolve, and we become better traders.

4:01
And I think that was probably one area where I evolved into a better trader, where I didn’t do the hedging as much. It’s not that hedging makes you a bad trader, a lot of people do it. A lot of really good traders do it. I think just for me as a retail trader, it’s not really in my wheelhouse to do it effectively. For instance, I used to trade like QLD and if I was getting nervous around a major news event I would buy QID as well and then wait for the event to pass and then I would close one of them out.

4:26
Well, what I ended up just doing instead was if I wasn’t comfortable with my exposure to the market around a major news event like CPI or FOMC or the jobs number or the PPI report or anything that was coming out that was going to have a big impact on the market…

4:41
Well, then I would just cut my exposure. Let’s say I was 50% long on the market. If I don’t like it, now basically all that I do is I just cut back my position some. I can always add back later if I want to, but I’ll cut it back. So let’s say I have 50% of my portfolio in five stocks.

4:58
Let’s say it’s Apple, Amazon, Google, Netflix, and Microsoft. I think that’s fine. And I don’t like what’s going on. I’ll close out Netflix and Google or maybe I’ll just take a third off of each one and essentially reduce my exposure from five positions to about three and a third positions.

5:15
So I’m listening. And if I need to do more than I need to do more. Maybe I need to take half positions off of all of it and cut it down to the equivalent of two and a half full positions. So that’s the main way that I go about doing that and the way that it’s probably the most effective for me. The problem with going like QID and QLD, it’s not that you can’t do it effectively or that it can’t be pulled off, but it’s easy to close the wrong one when you think you have the direction in hand.

5:35
Like for instance, the FOMC statement it’s actually coming out tomorrow as of this podcast recording and let’s say I go into it with a QID position. I think the market is going to go down but then as I get closer to it, I’m not quite sure. I want to protect myself in case it goes ripping higher. So I get into a long position for QLD. So I got QID and I got QLD.

5:52
Then the FOMC statement comes out and then the market is rallying really hard. Okay, we need to go ahead and close out the QID position, let this QLD start to work for me and as it keeps going higher and higher and higher, I’m feeling pretty good about this. But then the press conference starts and he starts talking and he starts saying things in answering reporters’ questions that starts to make the market get a little bit nervous.

6:09
And it starts to come back down again and then it just keeps going down and down and down. And then all of a sudden, the QLD I’m losing money on and the QID that I closed out before that, I also lost money on that. So I’ve lost on both of them in the QLD and the QID. But even more so like if you’re doing SQQQ and TQQQ, which are 3x and for those who didn’t know, when I was talking about QLD and QID, those are 2x leveraged ETFs. QID goes opposite of the NASDAQ-100.

6:51
QLD goes 2x in line with the NASDAQ-100. But then you can go SQQQ, which is a 3x short essentially on the NASDAQ-100, or you can go TQQQ which is essentially going long 3x on the NASDAQ-100. So let’s say I was using that and you’re going into this FOMC.

7:10
Well, let’s say the NASDAQ moves one and a half percent in one direction or another. Well then that’s the equivalent of like a four and a half percent move on both of those one’s going down four and a half percent, one’s going up four and a half percent. You’re starting to talk about some big moves and it’s going to be very difficult to not close out that position too early.

7:26
And then when you’re closing it out too early, you’re exposing yourself to potentially closing out the wrong ETF. And that’s definitely not what you want to do because you’re just doubling your losses at that point.

7:43
And by the way, I’m tasting some of this Irish whiskey here. Definitely one of the most interesting Irish whiskeys that I’ve had to date. It’s got some, like, I don’t know, like a fruity cake flavor to it. I don’t know if I’ve ever had any kind of a whiskey that has that kind of a flavor profile to it. But it’s definitely fruity and it’s definitely got some cake flavor to it, even like cereal flavor, like a dry cereal type. I don’t know what that’s all about, but it’s not bad.

8:00
So, to summarize this first question because we’re spending some time on it here. I don’t use the ETFs to hedge against each other. There was a time where I did and I would essentially wait for the market to make a move in one direction or the other. And once it did, then I would close out one. But there were times where I would close out the wrong one. And the more volatile of an ETF hedge that I was using, and if it was like SPXU trying to hedge against UPRO holy cow talk about increasing the potential for closing out the wrong hedge, especially around very volatile periods.

8:21
How many times have we seen the CPI report come out over the past year? And it will gap up and then it’ll sell off really hard after this massive gap higher that looks like, okay, everything’s fine and dandy in the world, inflation’s tame, and then all of a sudden, you think we’re going to rally for the rest of the day and as soon as the market opens, it sells off all day long instead. And we’ve seen where inflation comes in really hot and instead of selling off all day long it rallies.

8:53
So those are really easy ways to be suckered into closing out the wrong hedge and now you’re taking double the losses. So for me, I’m going to cut the exposure that I have in a stock if I’m not comfortable going into a certain report or a certain news event or a market-moving event, but I don’t like how much exposure I cut back until I am comfortable with it.

9:17
Now to this question here. He asks, I am struggling with moving up stop losses after I’m already profiting on the trade. I continue to get knocked out of the trades in profit, then watch the ETF or stock surge higher again after the pullback. How do you handle moving up the stop losses and not killing your trades?

9:37
So before commissions it was way more difficult because I was a younger trader. I was trading with smaller amounts as well. I couldn’t be dividing my trades into as many subplots, right? I mean, I couldn’t take like 10% or 20% or 30% of my trade off at any given time because all of a sudden you’re just adding more and more commissions. There’s times frustrating it was like twenty dollar commissions, guys. You imagine that?

9:56
I mean, $20 to get in and then another $20 to get 25% taken off the table and another 25%, another 25%, another 25% good grief! You’re talking about a hundred dollars in commissions to get in and out of a trade. So that definitely kept me from doing partial profits, right?

10:14
So I would have to move my stop losses up a lot more aggressively because I didn’t want to see a stock that I might be up six or seven percent pull back and I’m all of a sudden going red and it just keeps going down, down, down. There’s nothing worse than seeing a profitable trade, a very good and profitable trade, turn into a loser.

10:29
So the way that you prevent that is by raising the stop losses. And while I always think that raising stop losses and keeping risk-reward in your favor what has helped me to not keep those stop losses too tight is by taking partial profits along the way, especially in a commission-less environment, it’s much easier to do that.

10:45
And so, you don’t have to be as aggressive with raising the stop losses when you’re extracting capital and you’re extracting profit from the trade along the way. Because by doing that, when you’re taking and selling some of those shares, whether it’s a quarter, or ten percent, or thirty-three percent, or fifty percent whatever it is you’re reducing your risk.

11:02
And that’s what we’re always talking about: managing the risk. Managing the risk part profits is a function of managing the risk. And it makes it to where, okay, maybe I can be a little bit more liberal with how wide I set my stop losses. Maybe I can put it below a second layer of support so it has to break through two support levels before I get stopped out. And what I find is that the longer I’m in the trade and the more profits that I’ve taken, the wider my stop losses get.

11:24
So that when I’m on that final 25% of my trade or 33% of my trade, I might be working with an 8 to 10% stop loss because I don’t have as much capital at stake and it gives me the flexibility to have a bit wider of a stop loss because I’ve already taken so many profits off the table. And so going back to Bruce Leroy’s comment about getting stopped out on the pullbacks

11:50
Well, that’s why I like taking profits along the way so much because it doesn’t force me to have to keep my stop-loss always like 3% or 4%. It does initially, and I usually my stop loss is always the tightest at the very beginning when I first get into the stock. And then as the stock starts to appreciate in value, then I don’t have to necessarily raise that stop loss as fast in order to manage the risk.

12:07
And number three, he says, lastly, I’m getting to the point where I really don’t know whether to scratch my butt or wind my watch in this market. I think I do both sometimes, regardless if it’s a good market or not. But I know you recently did a podcast on the frustrated trader, so maybe I just need to listen to that one. But I had this question before I saw the podcast.

12:27
So the frustrated trader if you haven’t listened to that one definitely worth going back to because there’s going to be times in our trading where you’re going to be frustrated. I feel like January was very refreshing. I watched the market go up like 10% or something like that. I think it was like the best January since 2001, and it so many times defied the odds.

12:44
It defied the odds. We get these heavy sell-offs and you think, okay, we’re getting rejected at some key resistance here, especially that downtrend off of the January highs from 2022. We hit that and it looked like a solid rejection of price and then the next day, we just blow right through it. Those are very difficult periods of trading.

13:00
We are trying to be mindful of the fact that there’s some heavy resistance overhead in the market. It just blows through it. In many ways, it doesn’t even care. And that’s what we were dealing with in January. It was just this constant bid underneath the market.

13:19
It wasn’t so much that people were buying the dip. They never stopped buying. And so, when you got a seller on these very light-volume days that we were seeing, that was just constantly being pasted by this non-stop buying of stocks. As soon as that seller stopped, the market went right back up to where it was before and even higher.

13:34
So, it can create a very frustrating trading environment because it doesn’t ever seem like it gives you a good clear opportunity to ever get long on the market. And then like today, where we just surged into the month’s end you know, the next day is the FOMC statement. I’m not going to get long on something right before the FOMC statement when we’re at, like, incredibly overbought levels.

13:51
So without trying to get too into the technicals of everything and make it sound like I’m giving a market update, why I’m telling you all this stuff is because it leads to some frustrating trading environments. I didn’t even have a good January of trading and that stinks because I had such a great 2022.

14:07
And I was wanting to get off to a hot start but I didn’t. I’ve had that happen before and it’s not a big deal. Come back from it, you know. There’s over 220 days, I think, of trading still left in the year, so I’m really not worried about it at all. But over the last 12 months I’ve done great.

14:26
I just always hate it when I kind of have a month to forget. And it wasn’t a bad month in terms of, oh man, this one I’m not going to soon recover from. No, I was just down a little bit. It wasn’t even much. But a lot of that too is that the reason why I wasn’t down more was because I was patient with my entries. I was patient with the setups.

14:44
I didn’t try to trade every single day or try to go after every single move and I was patient. I was diligent because I knew I wasn’t getting into situations that were right for me. Had I not done that, I probably would have been shorting the market a whole lot more in January because there were a lot of sell signals that just simply weren’t confirming to the downside.

15:00
And so I was able to avoid a lot of those unnecessary losses that I always talk about and that’s a good thing. So I hope you guys enjoyed this episode. I’m glad to be back, I’m glad to be feeling better. Remember to check out swingtradingthestockmarket.com Again, your support in this podcast and make sure to keep sending me your questions, ryan@shareplanner.com. I do read them.

15:16
I mean, some of you guys are like on your second or third episode with me. So that’s a good thing. That means you guys are asking solid questions. So keep sending me your questions. I do read them, I love them, and it keeps this podcast going because without them, there’s no podcast. Also, make sure to leave me a five-star review because that really helps me expand my reach, to expand the audience, and that means a lot as well to me.

15:32
It’s the validation of my work too, and I feel like there’s more people listening and stuff. So keep providing me with those five-star reviews. They do mean the world to me. Thank you guys and God bless.

15:50
Um, before I forget, I gotta tell you about this whiskey that I had here. Again, JJ Corry not a bad Irish whiskey. Might be the best Irish whiskey I have had to date. Going on a scale of 0 to 10, right out of the gate, I want to give it because it does have some unique flavors to it I would say like a 6.9. I think it was pretty good.

16:11
I mean probably the best Irish whiskey I’ve had to date. It had a like a real nice fruity cake flavor. Had some cereal, like a… I don’t know, I wouldn’t say it was Captain Crunch, but it was probably what’s that cereal growing up that we ate that was like, kid-tested mother-approved, or something that the commercial would say? Pops! It’s Corn Pops.

16:27
It tastes like Corn Pops and cake. Cake and Corn Pops. Not bad, right? Again, 6.9 I’m going to give it. It’s probably the best one that I’ve had to date in terms of Irish whiskeys that JJ Corry.

16:27
All right, now I can say thank you and God bless. Thanks for listening to my podcast, Swing Trading the Stock Market. I 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. With your membership, you will get a 7-day trial and access to my trading room including alerts via text, email, and WhatsApp.

16:47
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. 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.