Avoiding Large Drawdowns | Podcast Episode #341

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 Trading the Stock Market. Today’s episode we’re going to talk about trying to avoid those large drawdowns. Now inevitably drawdowns happen in our trading. We might see a drawdown of three, four, 5%, but what we really want to try to avoid is those drawdowns that take us to like 1520, thirty, even 50% drawdowns because those are the ones that are almost impossible to come back from.

0:53
They’re the ones that really change the good fortunes that your portfolio might have been experiencing and just completely wipes them out. And today’s e-mail comes from a guy we’re going to give him a good Florida redneck name of Buck Buck Rights. Hello Mr. Mallory. I am 58 years old and up until last year I have been living paycheck to paycheck.

1:12
But starting last year I have the opportunity to collect about $30,000 more per year in addition to my standard pay. So for the first time in my life, I think I might be able to and have at least some sort of retirement and not work until I die.

1:28
With that being said, since last year I have spent my free time which is very limited learning and study in the stock market. I learned paper trading to get my feet wet and now I am actively trading for the last six months. I started out with $25,000 and was able to run it up to $36,000 only to see it go back to $26,000.

1:48
I promised myself if I ever go down to my initial base investment I would stop trading and just invest in long term stocks and CD’s and and other things. Since then I was able to get back up to 35,000, have plateaued out since then. I came across your podcast and I’m up to episode 118.

2:06
That’s pretty good. And now you stop losses on every trade and boy has that saved me more than I can say. No more drastic falling outs. So let me get to the point. I think I am having trouble finding the right stocks to trade. I have. Searched for stocks and look for stocks trending upwards but are at the bottom of a support line and trying to ride up to resistance points.

2:25
A number of trades have worked out for me. I tend to sell. If I reach a 15% profit. I now see that the better choice would be to move the stops up and ride them longer and maybe sell off portions and take profits along the way. Even still, I seem to be floating around this plateau.

2:41
I also see the market is in a downtrend and there is not much bullishness around possible reason for this dilemma. However, I intend to keep working for about 10 more years and hope to keep the yearly extra income coming along. So I’m wondering what your advice is for the services you provide.

2:58
What the type of setup I have described here? I’m a co-owner of an auto repair business and my partner and I are at the same age with the same goals. So I can watch the market throughout the day on my phone with quick check ins to see how my trades are doing and can take the time to hop in or out of trades without issue.

3:15
So at this point I do not have a big trading account but hope to increase it over the next decade to maybe settle with some sort of comfort and my older years. And hopefully leave with something for my kid when I move on. I intend to complete your entire podcast series as I always gain some new perspective with each new episode.

3:34
Thank you for that. I think at this point I am just looking for better companies to invest in with more reliable upside. I have looked over your offerings and I’m still not sure which ones are the best, most beneficial to my trading availability. Thank you for your time and efforts. Sincerely, Buck.

3:49
All right. Good e-mail, pretty long e-mail too, but nonetheless there’s a lot to unpack and I’m excited about knocking it out. Now the big thing is, Buck started off with a $25,000 trading account and one of the good things that he did before that is to get familiar with the stock market. He did some paper trading, trying to get familiar with the mechanics because there is a lot of mechanics. Just getting familiar with the buy and the sell process can be a little bit extensive. So he did that and then he went to live trading where he’s trading his own capital $25,000. That gets you above that pattern day trading threshold, which is also helpful as well. But as swing traders, we really don’t want to hold trades less than one day.

4:23
So what you saw him do though, he took that $25,000, he ran it up to 3536 thousand dollars and then brought it all the way back down to $26,000. That’s a significant downturn that’s, you know, about 30% of downside that he had to endure there. And that’s one of the things that when I talked about in the beginning of this episode, we need to avoid those circumstances.

4:42
Now he started figuring out some things along the way like using the stop losses from listening to some of my podcast episodes. He learned how important that was to be putting stop losses down, and that really does help you out, but it doesn’t just stop at stop losses. The timing of our trades, the aggressiveness of how we’re trading, all goes towards avoiding large drawdowns.

5:03
So, for instance, let’s say that your swing trading strategy was only to go long on stocks, and you use stop losses of three to 5% on each one of your trades, you would think to yourself, OK, I’m going to avoid a big drawdown. But if you got a year like 2022 where there is just a lot of selling that’s taking place, regular steady selling, yes there was some dead cat bounces along the way, but for the most part 2022 was marked with consistent selling.

5:28
And so if you’re using 3 to 5% stop losses along the way, but you weren’t really thinking about the timing of your trades or what kind of market you were trading in and you were just being very overzealous and overaggressive to the long side during these times, yeah, you probably have plenty of trade setups to take, but the timing couldn’t have been worse for taking those long setups.

5:48
And a lot of times what people have a difficulty in doing is seeing a really good trade setup and moving on from it because the timing isn’t right, the market conditions aren’t right either. The sector, the industry may not be right. And so moving on from that trade when you see those kind of conditions that persist is a good and noble thing in the world of trading.

6:08
But so often we let our egos get involved. Like, I can’t afford to pass this up. What if it actually does break out and runs without me? OK. So it runs without you. Who cares how many stocks every day goes up that we’re not a part of, or even goes up big that we’re not a part of? And who cares if they do that?

6:24
What we’re trying to do is we’re trying to find the right stock with the right sector, with the right industry in the right direction of the overall market to take advantage of. And oftentimes those things do not always line up. I’ve avoided a lot of financial trade setups this year because the financials have been a difficult place. I haven’t really wanted to trade utilities at all this year because utilities have really lagged.

6:44
But if you look at tech, those suckers have been running like crazy. If you look at discretionary or communications, those have been running pretty hard. And so using stop losses is important from having catastrophic trades on individual trade setups, hugely important, but.

7:01
Also important is our timing. How aggressive are we being when we noticed that the market is in the downtrend, when the market is not in a rallying mode? When the market’s down 400 points on the day and it’s still breaking out to new lows on the day, are we still adding new trades to our swing trading portfolio thinking that they’re going to go up in the next one or two days?

7:20
Maybe you catch the falling knife this time, but in most cases that’s not going to work out very well for you. And diverging a little bit from avoiding the large drawdowns, he also talks about how he tries to go for a 15% profit. And one of the things that I would always say about profit taking and setting targets, I never try to book my profits at my target price.

7:42
I mean, it’s great if the stock goes up to that, but I also don’t know if it’s going to stop there and nor does anybody. So we can look at resistance levels and if I get into stock ABC at a price of $100 a share, and I have a stop loss of $95 and I have a price target of $115 and that stock goes up to $115…

8:03
And let’s say I might have taken some profits along the way at 110 and then it gets to 115 and I’m sitting there. I have no reason to sell, but because it hit the $115 mark that I set when I got into the beginning of the trade, I go ahead and get out of it. But then I watch it go up to 120, 125, 130 and you’re like, why did I even sell that?

8:20
I should have just held on and then you beat yourself up for it. And so the reason why it’s not good to say, hey, I just want to get 15% out of every one of my trades is because it doesn’t really take into account reward risk ratio. If you’re getting into that mindset where you want to get 15% out of the trade but you’re risking 10% to get it, you’re only getting like 1.5 reward for the $1 that you risked.

8:40
And so that’s not as good of a trade. Making 15% on that trade is not as good as making 6% on the trade that you only had to risk 2% for. Because the one that you risk 2% for, you’re getting $3 in return for the $1 that you risked. That’s a way better setup than getting 3 for the 2 that you risked, and that’s what you get.

9:00
If you risk $10 to get $15, you’re getting a three to two return on your reward to risk ratio. So we don’t want that. And so when we approach trading setups, we should always be approaching it with the mindset of does this represent a good reward for the amount that I’m risking, and if it reaches that reward, that’s a great thing.

9:18
But that doesn’t necessarily mean we have to close out the whole position. That’s not what I do. At least if it hits the reward, I might take some profit off the table. Maybe I’ll knock it down to one third of a position or a half position, but I’ll let the rest run to see how much further can it run, and if it does pull back, then I’ll go ahead and get out of the trade.

9:35
But if it wants to keep rallying and it wants to get irrational, that’s great. As long as I was in it before it got irrational. Because once it starts getting irrational and you’re in that trade, that’s a wonderful thing when the buyers are doing all the bidding for you because you got into it long before.

9:53
And Buck here also talks about how he sometimes has trouble finding the right stocks to trade. And why would that be? Well, sometimes to find the right stocks to trade, you got to start to figure out what stocks you don’t want to trade. For me, I don’t want to trade individual biotech stocks, especially those trading under $10. I definitely don’t want to trade them. That’s reliant on one product or one product approval.

10:09
So as a result, I don’t want to have to read up on every one of these individual biotech plays. I just pretty much have a blanket policy. I don’t trade individual biotech plays. So I focus more on the biotech ETFs. I don’t trade stocks under $10. I don’t trade stocks that are low in volume, low liquidity.

10:25
I don’t want nothing to do with that. I don’t trade stocks that have earnings coming up within a week. So for me, there is a huge list of stocks that I won’t trade. And so that really narrows it down to 6 or 700 stocks out there that meet my criteria for what I’m willing to trade. And that knocks out a lot of stocks that I don’t have to pay attention to.

10:42
And then there’s some stocks that come along the way like Boeing or FSLY, that I just, I’ve seen too much irrational behavior, unexpected headline events that says I’m not trading that stock. And that doesn’t mean that I won’t trade that stock at some point in the future. But for right now, I want nothing to do with it. And plateaus will happen in your trading.

10:59
You will find that at times you might spend January through March or January through April with a really good run in the market. And then May through June, you start to plateau a little bit and like, what’s going on? I thought I was just going to make the same amount every single month. And that’s not the case.

11:15
You can’t expect to make the same return each and every month. Sometimes you’re going to blow it out of the water, sometimes you’re going to underperform, sometimes you’re going to come in red, sometimes you’ll plateau. And so when we start to plateau, we have to ask ourselves, why am I plateauing? What am I trading that’s lending to these results of plateauing?

11:32
So then when you start doing that, you have to ask yourself, are these stocks in good sectors and industries that are rallying? Even if the market’s rallying and we start to see that our profits are plateauing, why is that happening? And then we need to adjust. We always have to be willing to adjust. I’ve had to adjust a lot this year.

11:48
I had to adjust last year when the market went into a bear market. I had to get short on the market. And then this year, when the market I thought would probably stay bearish started to rally again, I’ve had to change that approach as well. You have to be cognizant of what’s going on around you. And Bucky asks about what kind of services are good for him.

12:04
One of the things that I do offer on swingtradingthestockmarket.com, which is the patron website that goes along with this podcast, or you can find out more about it by clicking Join. If you’re listening to this on my YouTube channel, you can click the Join button down below. And what you’re going to get with swingtradingthestockmarket.com is all of my market updates.

12:22
You’re going to get videos on the big tech stocks. You’re going to get daily watch lists, weekly bullish and bearish watch lists that are part of my master conglomeration of stocks that I’m watching each and every week. You’re also going to get videos on some of the best trade ideas that I come across each day. So check that out.

12:38
swingtradingthestockmarket.com. You’re going to get a lot of videos, a lot of research. It’s really good. You also want to be aware with the market what is technically developing, what sectors are starting to pop up some. For instance, this past week the industrials were starting to prop up some. They started to break out of a base. That was a good time to start focusing on some industrial plays.

12:56
Tech started to bounce. That was a good opportunity to start looking for some bounce opportunities. You saw the rotation in the small caps. That was a good opportunity as it pulled back to the base level and started to bounce to get back long on the Russell 2000. So we want to be cognizant of some of the more macro patterns that are forming.

13:12
One of the things that a lot of people get mixed up on though is they’re not necessarily looking for is industrials breaking out or is software stocks breaking out. They’re looking more for like the hype play. And the hype play has a lot of FOMO into it. And usually when you discover the hype, there’s already a lot of hype baked into the stocks.

13:30
There’s already a big move. You’ve seen it just recently with some of the electric vehicle stocks like Tesla, like Rivian. And so these stocks have made some massive moves and so people are seeing that. They’re seeing a huge move already and they’re jumping into those stocks. But that’s not what you want to be doing.

13:46
You want to be getting into those stocks or you want to be getting into the stories that are just starting to break out, which probably requires a little bit more faith because you don’t see the gains yet coming to fruition. But that’s exactly what we want as traders. We want to be able to get in as the breakout’s starting to happen so we can get the meat and potatoes of the trade.

14:07
We don’t want to front-run it before the breakout happens and we don’t want to overstay our welcome when it’s clear that the stock is starting to pull back finally and people are taking profits. So there’s got to be this willingness to get in in the early going and not wait. OK, I’m going to see if this thing runs up 30% before I get into it.

14:24
Then in so many cases it’s too late to get in and you’re going to be subjecting yourself to unmanageable risk. And I talked about the stocks that you won’t trade, but it’s also about finding the stocks that match your risk-reward profile. So when you find a good trade setup, it might be a beautiful trade setup, but it requires a 10% stop loss in order to achieve 30%.

14:44
For me that’s going to be a hard pass. I don’t want to risk 10% of my capital on a trade, so I’m looking more for stop losses that make sense around the 3 to 5% range. But for others that might be okay. But in some cases, if that’s not okay for you, then you have to ask yourself, is this a stock that I should even be considering trading?

15:02
Regardless of how good the trade setup is, how much it meshes with a top-down trading strategy, if it doesn’t match the risk profile I would have to move on from the trade. Because then I’m adding too much emotion to the trade, and there’s a good chance that I’m not going to manage the trade correctly.

15:23
Because we’re humans, we have emotion, and what we’re trying to do is trade the stocks, trade the setups, trade the opportunities that arise that’s not going to grossly impact our emotions. That’s not going to cause us to become irrational or completely throw the technicals out into the trash in favor of our emotions. We don’t want that.

15:39
We got to stay sane. We got to stay technically focused on the charts. So with that being said, if you enjoyed this podcast episode about avoiding the drawdowns and trying to make sure that you’re finding the trades that are best suited for you, I would encourage you on YouTube like and subscribe to the channel.

16:00
Make sure you’re getting that little notification bell clicked as well so that you can be notified of all my future podcasts and shorts and live streams. If you’re listening to it on Spotify, make sure to leave a 5-star review or on Apple as well. Those are all really beneficial to me. I greatly appreciate it when you guys provide the feedback and especially the five-star ones too.

16:22
So with all that being said, make sure to keep sending me your emails. ryan@shareplanner.com. Check out swingtradingthestockmarket.com or if you’re listening to it on YouTube just click the Join button down below. Thank you guys and God bless.

16:42
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. With your membership you will get a seven-day trial and access to my trading room, including alerts via text, e-mail and WhatsApp.

17:03
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. If you have any questions, please feel free to e-mail me at ryan@shareplanner.com. All the best to you and I look forward to trading with you soon.