Stops and Leverage Part 1 | Podcast Episode #326

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.

0:34
And today’s episode, we’re doing a Follow up from a guy from Australia. Might remember them as Barry and Barry asked some pretty thought-provoking questions. One of them that really stood out to me was talking to me about reconciling what the Bible said about gambling and how it pertains to the stock market, which is a roof, fascinating question. And one that I really wanted to spend a lot of time in an answering, but this episode we’re talking a little bit more about the stop losses. Stop loss management using some leverage. So we’re going back more into like the traditional questions here. And so I’ll go ahead and read the email to you that very right. He says, hey Ryan happy Easter to you which it’s a little bit past Easter but hey, I try to read the email in its entirety.

1:13
He says I have a bunch of questions to follow up with you on since my last email I’m really enjoying my trading at the moment. I’m making steady gains and I’m continuing to listen to your podcast question one. I know that you usually allocate the same amount of capital to each trade and take profits along the way.

1:29
However, do you ever add to your position as you go? I recently added more Capital to my brokerage account. So I’m treating with with around 800 dollars. I have around 100 dollars allocated to each position. Second part of the question. I know that you keep your risk as tight as possible to improve your risk, reward ratio.

1:45
However, do you ever use leverage on a stock if the risk is low question number two? So that question, one kind of had two questions to it, but anyways, we’re on to question 2. He says if there’s a turn in the market, for example, a decline in stock value across the markets of real big red day.

2:00
Do you close your positions or do you write it out to see if your stop-loss gets hit second part of the question? Do you pay much attention to the intraday price action of a stock and do you wait until the end of the trading day to take partial profits? I’m generally taking profits at around 3 percent gains in the position.

2:18
Well, yeah, it is a few more questions within the question. So is questions or more of like a series of questions. So it goes. Oh wait, there’s another paragraph here to he says also when raising your stop-loss do you wait till after the trading session is closed and with a key support level, do you wait for a pullback on the chart where the candles pull back twice?

2:35
Ice for example, on a 30-minute chart. Do you wait for a pullback on a bullish Hammer? Candle or wait to Candle, pullbacks to the same level. Question number three you ever trade Commodities and indices if you can manage the risk. Thanks again Ryan. Cheers, Barry.

2:51
Now, you gave me the opportunity to a different name, but if sake of, keeping the names, the same, when I’m doing a follow-up episode, I’m going to give them the name, Barry, but what am I drinking for this episode? I’m drinking Buffalo Trace. We did mash. It’s actually clear. It’s what I consider like the crystal. Pepsi of bourbon, right?

3:06
Because you know, the back in the 90s they came out Crystal Pepsi was actually not bad. I kind of thought it was good, I drank it all the time, back in the 90s, but this is called white dog. We did mash corn wheat and barley recipe of 57%, alcohol, 114 proof, so pretty strong.

3:22
The reason why it’s clear is because they don’t put it in the barrels according to my understanding, but it’s not bad. It’s got a strong ethanol flavor, but and it doesn’t have much now, but it’s not bad. I mean, I probably get like a 48, any case? So Barry from Australia here we want to we want to stay on task here, right?

3:40
Sometimes you guys give me a little heat for talking too much about bourbon. But question 1, he has an 800 dollar account. He’s trained with about a hundred dollars on each position. So in the grand scheme of things that comes out to about 12 and a half percent, that’s actually what I do about on each one of my positions. I do about 12 and a half percent.

3:56
So in this question, he asks, do I ever add to a position as I go? No, I don’t. And the reason why and there’s a number of reasons for it. If I add to a position as I go, there’s not Lot of scenarios that works in my favor and I know some of you will disagree with me for saying that, but here’s the reason why if I want to get into a stock let’s say x y z, right?

4:14
I always have XYZ or an ABC stock at 100, but it’s easiest to be able to just explain it to you using very simplistic terms when you’re listening to it and not seeing it on a chart. So I buy stock XYZ at $100, and I have a stop loss. Again, we’re making a simple, I don’t necessarily use 10% stop losses, but will you do it in this example?

4:32
I put a stop loss at $90 and then A initial position. Let’s say it’s a third of a position. I get into 3rd at $100 and then the stock moves up to 105 and I add another third and then the stock moves up to 110 and I add another third. Okay, now I have a buy-in price that’s five percent higher than where I originally got in.

4:49
So I’ve seen the stock move 10% but I’m really only up 5% on the trait at this point in time. That’s not the best situation to be in because if there is a reversal and let’s say, it goes all the way back down and it hits my stop loss at 90. Then I’ve taken a bigger loss than just Percent, it’s more like closer to 15%.

5:08
That’s not really something that I would be thrilled about, and we talked about, so often keeping risk type. Well, if you’re adding as the stock goes up, you’re actually increasing your risk. Assuming you’re not moving your stop loss as well. Now I get that. If you want to go on with a third of a position in the stock, goes back down and takes you all your stop-loss.

5:27
You’re not losing as much. And then there’s some people who want to only add if they get into the trade and it starts to pull back bike. For instance, they get in with a third of the position at a hundred and it drops down to 97 and then they’re adding another third. And then it drops down to 95 and they’re adding another third.

5:45
And if it hits 90 and it stops them out, yes. They’re taking a smaller loss on the trade than if they had just gotten in at 90. The problem is, if it’s a really good trade, I want to have a full position on it, you know? When it starts going down to 97 in the 95. Yeah, you’re adding to your position and getting a full position but that’s not like the ideal trade scenario, you?

6:02
I mean, it’s going against you for a period of time. Maybe it’s a breakout that takes place and then it pulls back down and underneath the breakout level and then you’re adding to it. At that point to me, I’d want to be adding above the breakout level. And so, let’s say you have a really good trade and it doesn’t actually dip down.

6:18
But you have a you’ve put a third on it, 100 and it goes to 105 and 110 and 120 and 130. But then you only got in with a third of a position from the get-go. So you really came to take profits. At that point, you’re taking like a third of a third or a quarter of a third of a position and it just really doesn’t play into like making good solid profits over the long term.

6:39
So that’s my frustration with adding to my position as I go, I also go into each one of my trades, believe in that. There are a good traits that I’m not necessarily that they’re going to win. I kind of assumed every traits going to lose, but doesn’t mean that they’re not good trade setups, but I just assume that you’re going to lose.

7:05
Come such a huge disappointment, because we had so much optimism on it. So, it’s good to have optimism on a trade setup, but you should always assume that the traits going to stop you out so that you’ll always take the risk serious. I know that kind of bumped heads a little bit there and it might not make sense but it really does. Make sense, believe it or not.

7:21
Now a, my long-term portfolio. I do adpositions over time. I mean, I don’t start off with a full position, especially in this bearish market that we’ve been in since 2022. Yes, I know we’ve actually rally pretty well off of the lows, but When we start getting these significant pullbacks in the market, I do like to add to long-term positions that I know that I’m going to hold for, you know 10 20 years or maybe even longer maybe it’ll be my kids figuring out when the close the trade out.

7:47
But those are more from the long term perspective and I like to build a position over time using, you know, just like, incremental adds to my position. What’s cool about doing it that way, is that? So many of your brokerage is now, for instance, like Fidelity you can buy $100 of a stock each week if you want or fifty dollars or twenty dollars or Dollars and you can just keep keep adding to it even if it doesn’t equal it to a full share, it’s really a cool aspect of the fractional share buying that you can do these days.

8:15
And what also is really cool is swingtradingthestockmarket.com. If you sign up for swing trading, stock market outcome, you’re going to get my stock market research each and every day that’s going to include multiple videos. Daily watchlist, weekly bullish and bearish master, watch list updates. You’re also going to get updates on all the big tech stocks and on the indices as well.

8:33
So check that out swingtradingthestockmarket.com. It’s really, really cool. And in the process, you’re helping to support this podcast. So, the second part of question, one, he asks, I know that you keep risk as tight as possible to improve your risk reward ratio. However, do you ever use leverage on a stock if the risk is low?

8:50
It’s tempting, right? If you take a stock like McDonald’s, for instance, very low beta. Take a stock like, Walmart very low beta. I mean, there’s a lot of like, a lot of utility stocks out there that are like that Costco. I mean, sometimes Costco can act Little bit.

9:05
But by and large, I mean, these are stocks that are kind of like slow movers, but would I ever use leverage on them? No, I’m a firm believer in trading the capital that I have. I think that mindset of going into leverage with your positions, will eventually start pushing you towards the realm of prop trading, which I think is a very dangerous Habit to create where you’re leveraging, your money, 20, and 25 to 1.

9:28
It’s just so bad to do. It’s almost guaranteed, you’re going to blow up your account if you start going in that direction. But even in trading with margin, So you got to ask yourself to if I’m trading with margin, it’s very difficult right now, especially with the interest rates. Right now, you’re looking at like 14 percent margin rates.

9:44
I mean, I was just looking at it on thinkorswim the other day and it was like 14 percent in granted, that’s because the FED keeps raising rates. As a result, the interest that they charge for using margins going to be higher. And so you got to take that into account. I like just shorting the buyout, right? I think there’s a lot to gain from that, but I’m using sh right now because the margin for short in.

10:04
It doesn’t If you’re leveraging your portfolio or not when you’re shorting a stock, you’re borrowing it. So you’re automatically going to be charged interest for borrowing a stop because that’s what shorting is your borrowing shares from your broker and then you’re selling them on the open market but you still have to pay back your broker.

10:21
So regardless if you got all that cash to cover it or not you’re still paying interest. So do I use leverage on a stock? If the risk is low? Definitely not. Especially in this environment, where I mean, how much do you expect if it’s a low-risk stocked for it to make a return?

10:45
In the given year, Well, interest rates are up 14%, so you’re risking all that extra money for a 1% gain that wouldn’t work for me, or if you’re expecting, like, a 10% return. In, you’re going to be paying 14 percent interest that doesn’t work either, and it doesn’t have to be just from one stock.

11:01
Your brokerage is charging? If not, then it’s not even worth doing it. It’s Not even worth doing it when you consider the risk of doing it, if you think that you can make 15% or 20% probably, I just wouldn’t do it. And so that’s probably I don’t know if a lot of people even check the interest rates when it comes to margin.

11:17
I hope they do but that’s a great reason not to use margin. I mean there’s a lot of other reasons that I could give but the interest that they’re charging on margin right now is definitely a reason not to use margin and when they cut rates when the FED Cuts rates one day, what I use to then no because then you’re starting to think about the whole Idea of, I need to make profits.

11:37
I need to make money in the stock market and you’re not really putting what’s the most important thing and that is managing risk. And when you increase the leverage on a tray, when you’re using margin, then all of a sudden you’re expanding your risk because you’re using money, that’s not yours and trust me, the brokerages aren’t going to lose their money.

11:54
First, you’re going to lose your money first and so even if they do lose their money, they’re going to tell you to pay it back because that’s what you agreed to do. The next question and that was all just question one, but it was a good question. We may have to make This two episodes. If there is a turn in the market, for example, a decline in stock values across the board, you have a strong red day to the downside.

12:12
You close your positions or do you write it out and see if your stop loss is hit second part of this question. Do you pay much attention to the intraday price swings of a stock and do you? Wait till the end of the trading day to take partial profit? I’m generally taking partial profits at around three percent gains in the position.

12:30
Again, another good question. Yes, I’ll do that all the time actually, if I’m in a good trade. In the stocks made a good run and the market conditions start to turn on me. I will take profits, sometimes I’ll take only partial profits if I’m just a little bit concerned, but if there’s like a significant concern there, I’ll close out the whole position, no questions about it.

12:49
And the reason why is this, I use a top-down trading strategy. So I’m looking at the first off a my trading in the direction of the market. Second, one is my trading stocks that are in the right sectors and in the right Industries. So if the stock that I’m trading doesn’t align with the industry, Sector and the market that I’m trading the overall Market Direction then.

13:09
I don’t want to be in that stock. Now, sometimes that can be frustrating, because it results in I’ll tell, you know, saying, no to yourself on a lot of trade setups, but if I’m in a trade and it’s going well, and I start seeing the sector turn for the worst where I see the industry start turning for the worst or more. Importantly, I start seeing the market turned for the worst.

13:25
Yeah. I think it’s a good idea to close out the trade at that point, otherwise you’re putting your profits at risk. And so using that top down trading strategy, it doesn’t just apply to getting In the trades. But also deals with how you manage your trades. And when you get out of the trades as well, and I do pay attention to the intraday price actions of stock.

13:42
Do I necessarily base all my decisions off of what I see during the course of the day. If we you know, pop two percent and drop one percent. Does that mean I’m going to get out because we’ve given up half the day’s gains know. Usually what I’m looking at is the daily candle, how is that daily candle? What it looks like it’s going to be printing as in the last 10 to 15 minutes of trading.

14:00
How does that affect the stock going forward as all of a sudden, the thesis for why I got into it? Originally is Null and void. If it is, that’s a good reason to close out the trade, but if it doesn’t jeopardize the reasoning by behind staying in the trade, then I’ll remain in it. So a lot of those decisions, usually do come at the end of the trading day.

14:17
But if there’s something significant that’s happening in the beginning, that might have materialized overnight and say, like the Chinese markets or the European markets, or there was something really bad piece of news that came out in the pre-market, then. Yeah, I might go ahead and start booking some prophets, some or all of them at the open and he talks about how he generally takes partial profits at around 3 percent.

14:35
Sent in the position. I think at the very least trying to take profits where you’re getting a one to one return on your trade. For that first, third is important. I think you can go from like a one to one and then take another third at two to one and then you can take the last third at three, two, one, that’s even better because then you’re ensuring that you come out with two to one return.

14:54
It’s even better if you can. Go beyond the three, two one on the last third and let that winter run wild, that’s phenomenal, when you’re able to do that as well. So we only got two half of his questions. I’m actually excited about doing the second half on the next podcast. Dude, from Barry here. Lots of good questions and hopefully it’s helping you guys out again this Buffalo Trace white dog, weeded mashed I would probably pass on his only costs 20 bucks.

15:14
It’s probably you know a nice show piece because people ask questions what the heck is that? Because it’s clear Buffalo Trace. Essentially just never went into the barrels but what a say it’s the most favorable thing but maybe I should just look up on YouTube and see, you know, there’s some ideas that people have with it whether it’s a cocktail or some other way of drinking it that I’m not aware of.

15:32
So any case, if you enjoyed this podcast, Episode. Make sure to leave me a five star review that really does help me out. It means the world to me. Also keep sending your questions ryan@shareplanner.com. As you can see, I try to do as many podcast episodes off of your questions as possible even follow-ups.

15:48
So this is all about having a connection with you guys and answering your questions and growing as Traders together. And finally, make sure to check that out. swingtradingthestockmarket.com, send your questions to ryan@shareplanner.com. Thank you and God bless. Thanks for listening to my podcast.

16:05
Swing trading the stock market, I like to encourage you to join me in this 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.

16:21
So go ahead, sign up by going to shareplanner.com trading block, that’s www.shareplanner.com/trading-block. And follow me on SharePlanners, Twitter, Instagram, and Facebook, where I provide unique market, and trading information. Nation 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.