Using Stop Losses at the Stock Market Open | Podcast Episode #343

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. In today’s episode, we’re going to be talking primarily about stop losses, about why I don’t hold my stop losses overnight, why I don’t use good to cancel orders.

0:42
Also, we’re going to talk a little bit about 3X leveraged ETF’s. What are some of the downfalls on them? Why I try to stay away from them primarily even at the cost of maybe not making as much on my trade when I’m normally trading ETF’s. But this e-mail today is going to come from a guy he has to be called.

0:59
Bongo Now I don’t know what Bongo means or what what the meaning is behind it but I tried not to use people’s original name so I let them either make up a name where I come up with one myself. Usually a Florida redneck name if it’s me making it up. But anyways, Bongo writes. I Ryan, been listening to your podcast for quite some time.

1:16
When I run out of fresh episodes I backtrack in time. Got as far back as October 2021 so far. Love the show. I especially enjoy your keen takes on the psychological aspects of trading. He’s going back to October 2021. He’s. Seen a lot on the show so far that’s probably like 150 plus episodes I would think.

1:34
My question has to do with trades overnight, holding trades overnight. I remember you said that you never trade in the 1st 30 minutes in the morning due to the high volatility that happens then. Does that also mean that you don’t hold your stop losses overnight, resetting them at around 10:00 AM each morning then? And a related question about holding inverse ETS, do you hold those overnight?

1:54
I tried to do some of the math on these. And there is an effective negative compounding of a fluctuating inverse ETF that seems to hurt returns there. Could you get into that one? Thank you. And you can call me Bongo if this makes the show. You got a bongo, you made the show. So a good e-mail here.

2:10
A lot to dive into. Essentially 2 separate questions about stop losses and ultra ETF’s. Now I don’t take trades in the 1st 30 minutes. I’ve I’ve mentioned that a lot on the podcast. I’ve tried to completely stay away from trading in the 1st 30 minutes from a new position standpoint.

2:25
So. If I really like the trade setup on Apple and I really like the trade setup in Google or Ford, I’m not going to trade them in the 1st 30 minutes. I don’t care how much they run without me in it or how good the trade setup looks, I won’t trade it in the 1st 30 minutes. Has there been times in the past where I have made trades in the 1st 30 minutes?

2:44
Yes I have, and I think there was times where I maybe wasn’t as convicted in that way about the 1st 30 minutes as I am now. It’s pretty much a cemented. Practice in my trading. Now if you go back, you know, 6-7 years ago probably there was times where I would make exceptions to that rule and there have been.

3:02
But at this point, no, I’m pretty much stuck in my ways on that first 30 minutes of trading. I won’t, I won’t deviate outside of that first 30 minutes. Now that doesn’t mean that if I’m holding a trade and it gets stopped out in the first 3 minutes that I won’t let the stop loss trigger. In fact, I do it and I do it often, try not to do it as often, but I still do it on a regular basis when there is a losing trade.

3:22
And why do I not just wait until 10:00 AM? Well, because it is some of the most volatile period, the most unpredictable moments of the market day. That first 30 minutes of trading, the worst thing I could probably do is not use a stop loss. Yes, there’s going to be times where getting stopped out in the first 30 minutes of trading is extremely, extremely frustrating.

3:40
And the reason for that is that because it’s so unpredictable, you might get stopped out and the stock goes right back up and and starts taking off. Maybe it goes up five or 6% on the day and you’re like, I just took a 2% loss on this thing. That’s really irritating. I can’t tell you how many times, but that has happened to me over the years and it’s going to happen to you when you try to be a discipline trader.

3:59
It just it’s it’s a part of trading. We try to perfect trading. It’s kind of like golf. You’re always trying to get better, but you’re never going to shoot at 18 on golf, right? But you’re always trying to still get better. Same thing with trading. Always trying to get better, but it doesn’t mean I’m going to eliminate losing trades or being stopped out in the first 30 minutes at times only to see the stock go right back up.

4:17
But with those wild swings, they can take a turn far worse than we could expect. I’ve seen trades that open up four, 5% down and in that first couple minutes of trading they make their bottom and shoot right back up into positive territory. And that’s really upsetting. I mean, there’s nothing worse than seeing that happen.

4:35
You really start to doubt yourself as a trader when you see that happen or even worse, you want to start adjusting your rules as a trader. Like well, I’m not going to let that ever happen again. I remember what happened last time when I followed my stop loss in the 1st 30 minutes of trading. I got stopped off and only saw it go right back up. I got into it at a BC at 100.

4:51
I had my stop loss at 95, goes down to 9498 and shoots right back up. And then we start to make adjustments on our trade based on that one bad experience. Now I would say if it’s happened to you 200 times where something’s going on there with your trade, I would try to see why. Is that pattern continuing to to pop back up, but when it’s a one off time when it’s happening here and and maybe further down the road there, but it’s just more happen chance than it is consistently, then that’s just part of trading.

5:20
There’s going to be frustrations with trading and that’s why so many people don’t make it because they start adjusting the rules off of these one off events that can be very frustrating to endure through and then they try to make permanent changes to their trading strategy going forward when they shouldn’t be. And it causes them to become less disciplined in their trading, which they should not be doing.

5:37
Now the one thing that I do is I reset my stop losses each morning. And the reason for that, and I’ve had a few instances over the years, and this is probably far more and frustrating than anything else that I’ve talked about or we’ll talk about today. And that is when you see your stock open up.

5:52
So for instance, you get in the stock ABC, set your stop loss at 95, you hold the stock overnight, you have a good to cancel order stop loss. The next morning you wake up, the stock opens down to 97 and takes off right back up to like 100 and 203 dollars.

6:08
But then you see that you were stopped out at $97.00 and you’re like, how the heck did that happen? I put in my stop loss yesterday at 95. How in the world could that possibly happen? And so that happened to me a couple of times and I was so enraged by that because I said they triggered my stop loss without even being hit.

6:27
And what will often times happen is those stop losses can be triggered. And I’m not saying it’s the same for everybody was for me on on thinker swim, it was happening to me. Thinker swim worked with me. They were nice about it and they made things right. But they also explained to me what was happening to where. They essentially said that the stock had a ask price for like a split second.

6:46
You wouldn’t even have caught it with your eye. But there was a ask price at one point below the $95 stop loss, and that triggered a market order. And while it only lasted for like a split second, again probably would have seen it even on the bid ask when the market opened. But it happened so fast, it triggered it and by the time that order got filled, it was already had a bid ask you know around 97 and you’re thinking to yourself but it never traded down there at 95 and you’re right but sometimes and you got to make sure about this that your stop orders they can be triggered by by the ask price going below the stop loss.

7:17
So that’s when I basically said to myself I will give the market a couple of minutes each day to kind of settle in, get those. Crazy bid asks that might pop up from time to time and let those get digested and out of the system before I put my stop losses in. That doesn’t mean I wait till the end of the first 30 minutes. I’m usually within a minute or two I’m putting my stop losses on and the more trades that I have open, the longer it takes me to put my stop losses on.

7:40
Now if I wake up one morning and the markets down to 100 points on the S&P 500 and I’m look like blowing through my stop losses, yeah, I’m going to go ahead. I’m not going to wait around. I’m going to go ahead and get it right out of them at the market. Open now sometimes.

8:00
Sometimes at the market open there is these little nuances that you’ll see when you see a significant sell off in the broader market where there’s a lot of panic. Sometimes you can see it in your individual place. The market kind of shoot up from maybe like 45 seconds to a minute or two and you can get out maybe at a little bit better of a price than where you were gapping below your stop loss at.

8:19
I would just try to be observant of that when you see. Significant gaps and to the downside in the market, just seeing that first couple minutes, do you if you don’t see in your some of your individual stocks or just in the market as a whole pick out maybe some of the Fang stocks and look at how they respond. If they don’t like pick up for just a little bit.

8:35
Sometimes you can save a percentage or two just in that first minute of trading. But I’ve been asked a lot over the years, Ryan, why don’t you just wait till the 1st 30 minutes of trading is over and it really goes back down to managing reward risk on all my traits. Yes, I can probably stay in a lot more trades if I waited for that first 30 minutes to expire.

8:52
But then there’s there’s those one off cases just like we were talking about the crazy bid asks at the open at times. But there’s also those one off cases to where I might be looking at a 5% loss on a trade, a gap below my 3% stop loss that I had on the trade and it’s you know a 5% loss instead.

9:10
And I wait for the 30 minutes to pass, but there’s just a crushing wave of sellers that come within that first 30 minutes and all of a sudden I might be down 11 or 12%. And that’s something I don’t want to do or not something I don’t even want to risk because then that puts you way behind the 8 ball.

9:25
You’re trying to make up for that 12% loss in a very big way going forward. That’s something that wipes out a lot of winning trades and it may not be because you had a 3% stop loss that turn into a 12% stop loss. It’s also could be something maybe you’re a person that uses a 10% stop loss and. You know, you wait for the 1st 30 minutes, but within that first 30 minutes the stop loss goes from being down 10% to being down 20% and then you’re making up for that.

9:48
What you’re trying to avoid is multiple R’s on the reward risk ratio hitting you to where you’re having to make that up and across a lot of future trades going forward. So for me. More than hoping that I can eventually be right on the trade, or hoping that the stock will turn around in the 1st 30 minutes and I don’t get stopped out.

10:05
More important to me is keeping that reward risk ratio intact, even if that means I have to tap the risk side of the trade in order to make that happen. Now in the 1st 30 minutes of trading you can see some really weird things. That first 30 minutes you’ll you’ll see either like a surgeon buying or a surgeon selling. You’ll usually see a strong move right out of the open, especially when it’s a significant gap down or gap higher.

10:25
The other thing that you will also see is around that 945 mark, you will see what I like to call the turn, the 9:45 AM turn where you’ll get a reversal in the opposite direction of whatever the markets been trending in that first 15 minutes. And then around that 952-9053 mark. Then you’ll start to see it pick back up in the original direction that the market opened up at.

10:44
Now again, is this something that happens every day? No, but it does happen quite frequently, especially in a trending market, say if the markets trending higher and you get a gap down, you might sell off for a little bit. And then at 9:45, you’ll get that 9:45 AM turn and then around 950-2953 you might get a push lower or you’ll see in a reacceleration of that turn that you saw at 9:45 AM.

11:06
So you can really go different ways, but those are kind of the time periods that I like to keep a close eye on, especially that 9:00 o’clock where you get a surge of either panic buying or panic selling. And then at 9:45 AM where sometimes you’ll reverse whatever you saw in that first 15 minutes of trading. 950-2953 it that’s a little bit more give or take. Sometimes it shows up sometimes it doesn’t. It doesn’t have to necessarily happen just because it you had a turn at 9:45 AM.

11:26
Now on the second question that was asked, he said when it comes to holding inverse ETS, do you hold these overnight? I tried to do some math on this and there is an effective negative compounding of a fluctuating inverse ETF. It seems to hurt the returns there. Could you go into that?

11:43
Yeah. If you go into especially like if you look at like some of these volatility index place. If you go into like UVXY for instance, I mean it over time, I mean this thing just continues to drop perpetually. If you look at SQQQ, a lot of people are playing that right now trying to get short in the market.

12:02
But if you try to make that a long term investment out of that, you will lose over time. Now there’s a time decay in these where they’re having to reset each night in order to get that three to one return each and every day. So with them having to try to get that three to one return each day, they have to reset the ETF and as a result.

12:20
It creates a time decay element and the ETF that you don’t really want to be a part of from a longterm standpoint, can you get away with holding it for a couple days? I mean, the ETF people will probably tell you don’t do that at all. Now have I done it? Yes, I’ve done it. I’ve held it overnight. It wasn’t the end of the world.

12:35
It’s not as much of a time decay from one day to the next as much it is from holding it for like a month or a two months period. Yeah, you’re going to see some heavy time decay at that point. But I will trade 2X ETFs but primarily and I’ve done a podcast episode that you can go back and look at it. I primarily focus on the 1X ETFs.

12:53
So right now for instance I’ve been bullish on small caps. It’s you know IWM it was bouncing off of that 180 level. I got long on it there and then I got long on it again after I closed out the first trade for like a 3% profit. I got back in it again and I’m up about 6% on the trade now if I had done TNA.

13:13
Of course I’d be up like 18%, so I’m giving up some of those gains in order to better manage the risk in order to avoid that time element. Because I don’t know if I’m going to be successful when I’m trading TNA and if I’m not, I don’t want to get stuck in a long term trade. And not only that, but your entries have to be pinpoint precise because really I can risk 3% on IWM or I can risk 3% on TNA.

13:33
But with TNA if the stock drops 2% I’m already out of it, the stock drops 2% on IWM or the ETF on IWM. If it drops 2%, I’m still in the trade and oftentimes it might drop 1 or 2% before it finally starts to pick up the steam to the upside.

13:50
But with TNA you got to be pinpoint precise if you’re going to try to use the same kind of risk parameters as you would on a 1X. And that’s where I find myself unable to trade the 3X oftentimes. Sometimes I can do the 2X ETFs, but still more times than not I’ll do the 1X.

14:05
Now in 2022 I did a lot of 2X ETFs. I did a lot of the SDS. I did a lot of QID and I made some good money off of it and there’s times where I wish I was more aggressive using those even still today, but I’m not. I think over the last year I’ve definitely curbed that exposure using the even the 2X.

14:25
I’ll still use them at times but not as much. And so yes I give up 18% on IWM right now for 6%, but I’m also able to control my losses much more. For instance, there was an initial pullback in IWM just over the last week. That would have been enough for me to get out of my trade and.

14:41
TNA which is the 3X long version of IWM. But because I was trading with less volatility with IWM I was able to withstand some of that pullback and be able to hold through it and then let IWM go right back and break the previous highs. TNA I probably wouldn’t have done that.

14:57
So I still think even though I might be taking less from one trade to the next when I’m using IWM versus the results that I could have had with TNA, I think in the long term because I can better manage the risk because I can stay in the trade for longer and not be hit with that time decay.

15:13
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15:31
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15:46
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16:02
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16:18
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16:38
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16:59
All the best to you and I look forward to trading with you soon.