Two Takes On Stop Losses | Podcast Episode #380

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.

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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.

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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.

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In today’s episode, we’re going to talk about a couple of different things, but the main thing we’re talking about are stop losses.

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We’re going to talk about two different approaches that I would say 95% of us probably fall into the category of of those who actually use stop losses and adhere to them.

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The other topic that we’re going to talk about is just some conviction and trades. When you have some pretty good runners and that momentum starts to wane a little bit, what do you do there?

0:58
So we’re going to talk about both of these topics and this podcast episodes.

1:02
So the e-mail that I’m using today comes from a guy we’re gonna call Ricky. He’s a previous emailer to the show and that’s the name we used last time.

1:09
We’ll use that one again, Ricky writes. Hey Ryan, Been a while since I sent you an e-mail, so I figured I’d ask some questions that I have been curious about.

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I’ve taken plenty of trades since I began back in May, and man, I honestly really enjoy swing trading.

1:21
I’m still at break even, but really just working on staying consistent and nailing down my process and overall trading strategy, which feels good as of late.

1:26
My two questions for you.

1:31
Number one, I’ve heard you mention your stop loss and risk reward on setups and it sounded like you were basing a stop loss percentage from an entry price.

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For example, I hopped into Rivion today. That’s stock symbol RIV.

1:42
And for those wondering, on December 4th around $17.90, my stop loss is set around $16.45. From what I understand that would be too wide of a stop loss for you at around 8%.

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When I calculate my risk on the trade, I’ve always thought it based on the total size and the amount of shares I buy out of my total portfolio value never exceeding 3%.

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In this example I bought 9 shares and I’m risking $1.47 a share for a total of $13.23 when I divide that by my total account value $600 to get approximately 2.2% risk for the trade.

2:16
If this was higher than 3% I would most likely adjust my trade size. What do you think about this?

2:20
Is this just a different way of looking at risk on a trade or am I missing something? Second question, I’ve been in a handful of trades now that have run higher, but I haven’t hit my target prices yet and it’s hard to tell just when I should be taking profits or just stick to my trading plan.

2:36
I understand that it all depends and I should be flexible, but you always hear that line about having conviction in your trades as well.

2:41
I’m sure I’ll get better at seeing the weakness over time, but I’m curious on how you view weakness and when you might think to take profits when you are up and the momentum seems to be slowing down.

2:52
I appreciate your podcast and YouTube channel very much and hope that you have a great holiday with the family.

2:57
Sincerely, Ricky, that’s a good e-mail. Couple of interesting topics that I’m excited to take on here.

3:04
First off, and when it comes to stop losses, there’s really two camps that pretty much most of us fall into.

3:10
What did I say like 95%, something like that. I I would probably guess.

3:13
I know that 95%, the two schools of thought is one, you buy the amount of shares. This is what Ricky’s doing here.

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He’s buying the amount of shares that won’t exceed a percentage of risk and its total portfolio value.

3:26
So there’s two camps that I think most people fall into or what did I say about 95% or so. So that 95%, the first one buy an amount of shares that won’t exceed a percentage of risk.

3:37
Now I know listening to that might sound a little bit of confusing, so I’m gonna try my best to explain it.

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So let’s say you have $100 in your portfolio that you’re trading and really all you want to risk is like 5% of your portfolio value on a single trade.

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Now what does that look like? Well, that means that you’ll buy as many shares as possible to where if your stop loss is hit, it won’t exceed a 5% loss of your total portfolio value.

4:03
Not saying that it’s a wrong approach, but there’s pros and cons to that approach, just like there’s pros and cons to my approach as well.

4:09
Now the approach that I do is my risk is based on or. My stop loss is based on the position size and then the stop loss percentage, meaning that I have a fixed dollar amount with every single trade I make.

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And the other scenario the position size is going to vary. You might be trading up to 80% of your account value on a single trade because you have the risk so tight.

4:30
Whereas for me, I’m always trading like 12% about on every one of my trades and so that risk is based off of the position size and then the stop loss.

4:37
So why I say it’s position size first? Because that’s going to be the real determiner of how much I’m losing on a trade because the position size is a major determiner. If that’s AI think that’s a word determiner, yeah, maybe not maybe that’s a Bush ISM.

4:50
But anyways major determiner of what the risk is on the trade. And then of course you have where my place and my stop loss at.

4:57
So usually my stop losses range somewhere between like 3 to 5% on average. That means if I’m taking like a 5% loss, I say I use 12% of my capital on a trade.

5:08
Let’s make it a little bit easier. For a numbers sake, let’s say that with $100 portfolio, you’re using 10% of your portfolio on a given trade.

5:16
So that means at the most that you stand to lose is $0.50 on your trade ’cause if you’re trading with a 5% stop loss and you’re trading 10% in your account, that’s $10 out of the $100 and then your stop loss is 5 percent. 5% of $10 is $0.50.

5:33
So from that account, the total risk exposure to your account is .5%, point 5 of 100. So the way I do it, it’s a much smaller risk to the trades.

5:45
The way that Ricky’s doing it, he does take on a bigger risk. So in his case, he never goes beyond 3%, so the biggest loss that he can take to his portfolio is 3%.

5:53
Now with that, you can get some pretty big gains to your portfolio as well.

5:59
So if you have a pretty tight stop loss, that means you’re gonna be able to buy a whole lot more shares in Ricky’s scenario here again with a tight stop loss.

6:07
And then if he’s right, he’s gonna have a huge win. The risk that comes along on that is that there’s often times unforeseen consequences that happens in your trades that you can’t expect.

6:17
Now, I’m a huge proponent, like I said, using stop losses. I use them on all my trades, but there’s no guarantee that you’re going to get out at your stop loss.

6:27
Most of the time, if your stop loss is hit, I’m getting hit at my stop loss. And it’s not a perfect mechanism, but it’s the best mechanism that I have found over the years.

6:36
But the risk of it is, is that if there’s an unforeseen event and let’s say something, let’s say you’re in apple, right, you’re in it and you have a stop loss at 3%, which gives you a lot of room for a stock like apple typically.

6:47
And let’s say, though they have, and they’ve done this before, they have our earnings warning and all of a sudden the stock plummets by 10%. Well, based off of what Ricky’s doing, that 10%’s gonna hit you a whole lot harder than the way it’s gonna hit me.

7:00
That 10% for me will be about 1% of my account, whereas for Ricky it’ll be around 10%. But if for Ricky it could be a whole lot worse than the 1% that I suffered, he’d probably take a whole lot more because he has a much bigger position size.

7:14
So like I said, with Ricky’s approach, big gains if tight can result in some big wins because your variable is the position sizes, your position sizes or going to fluctuate.

7:24
And so with the tight stop loss with big position size can result in big wins and big profits. But on the flip side, if it goes against you, it can get kind of ugly there.

7:35
Or if there’s like a downgrade or something happens where they buy out a company and your stock sinks while the other company that got bought outsourced, Yeah, so there’s there’s pros and cons to that and there’s pros and cons to my approach too.

7:44
So I’m not trying to say you can’t do this or you should never do this.

7:49
It’s really about what are your tolerance for risk. I think the way that Ricky does it, there’s the potential to have a blowout in your account.

7:59
For me, I’m not going to have as much profit if I have the same kind of a winning trade because my profits are gonna always be based off of that 12% position size or in the example that I gave you, off of a 10% position size.

8:10
So my gains are gonna be more consistent, my losses are gonna be more consistent. Yes, I can gap down below like in the case of like if there was like a earnings warning for Apple and they dropped 10%, yes, I will take a 1% hit on the overall portfolio, but it won’t be catastrophic or something that I can’t recover from.

8:28
So with a fixed position size, I know what my worst case scenario is. That means I buy a stock and the stock goes to 0 the next day or overtime or whatever, which God forbid that’s happened.

8:42
You know, that would have to mean for me that the stock has some unforeseen event that sent it right down to zero, kind of like what we were seeing with some of these banks during the regional banking crisis.

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And I know people that got their heads handed to them from the regional banking crisis.

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So my worst case scenario is that my position size takes 100% loss, it goes to 0 and I lose that entire position.

9:07
Whereas if you’re trading with major size because you went into a trade with a stop loss that was very tight in Ricky’s case, then if you have something like that where it goes to zero, it can wipe out your whole account depending on how big that position was.

9:17
Now my approach more boring but more consistent.

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Ricky’s the more excitement a little bit crazier. That’s why I always say make trading boring.

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The more boring you get it, the more profitable it tends to be over time.

9:32
One thing that I would also encourage you guys to do is check out swingtradingthestockmarket.com.

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Swingtradingthestockmarket.com gives you all of my stock market research each and every day. That’s going to include daily watch lists, master watch list updates each week for bullish and bear stocks.

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Plus you’re going to get updates throughout the week on big tech.

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You’re also going to get trade reviews. Plus you are going to get updates on the general market as well.

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So check that out. swingtradingthestockmarket.com Super cheap and you’re supporting this podcast as well.

10:00
Now the second question. He’s in some trades.

10:02
They’ve made some good runs, but they haven’t hit his target just yet. He’s worried that if he doesn’t stick to his plan, he doesn’t have that conviction for his trade.

10:09
Now, one thing I would say is I don’t have any conviction in stocks. I don’t.

10:12
I don’t. I go into every trade, I assume that I’m going to lose and I don’t assume that the stock is looking out for my best interest.

10:19
So I don’t have a conviction about stocks, but I do have a conviction in my approach to trading.

10:25
And so there’s a difference between that. One is my approach to risk management, how I take profits.

10:31
That’s what I have a conviction in. I don’t have a conviction necessarily in stocks overall.

10:36
I’m very leery of stocks in general. I know the kind of disaster that they can create for you and I think a lot of people that are trading don’t have that same respect.

10:42
But what I would say about target prices is target prices don’t require you have the same conviction as you do about stop losses.

10:49
Target prices are more guidance per SE.

10:53
I always say that I base my target price off of what is the path of least resistance where there’s a meaningful profit that can be had without having to encounter a lot of resistance along the way.

11:03
If I can identify that, then that’s where my target price is going to be at.

11:09
But it’s not fixed in stone. Sometimes you start to see where a stock might starts to struggle, maybe after you’re up 3 or 4% and you have a price target of 15%.

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And you’re like good chance with how overbought this market is or how this market has been behaving of late, it never sees that 15% anytime in the near term.

11:25
So you have to adjust your expectations some, but target prices for me as well comes down to whether or not my risk reward on the trade going into that trade merits me buying that stock.

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And so the the target price helps me to determine the potential reward versus the risk that I’m willing to put on the table to make that trade order to hopefully realize that profit target.

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But if you reach your target price doesn’t necessarily mean that you need to get out of the trade.

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A lot of people, they hit those target prices and they get out of it completely and then they watch it, just keep going higher.

12:00
Like, man, why did I ever sell it?

12:02
Well, I would tell you that stocks don’t care what your target price is. They don’t even know what your target price is.

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So they’re gonna go wherever they want. It’s a guidance for you to be able to determine whether or not it’s a good trade to get into in the first place.

12:11
So along the way on a trade, I like to take profits.

12:15
I definitely like to take some profits at a target price. But if I’m hitting my target price, rarely am I selling it just on the spot, right?

12:22
Oh, I hit my target price. I’m out.

12:23
No, what I’m usually doing is I’m trying to ride that thing as long as I can, often times by the target price.

12:30
That’s usually where I’m taking my my second chunk of profits off the trade. And then I’m left with this like ride or die position.

12:36
Like the last third of a position that I’ll try to let run wild there and then see how high it’ll go.

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Sometimes it’ll blow right past the target price and go even 10 or 20% higher. And if it does, that’s great.

12:46
I want to be along for that ride, so target prices. Don’t put too much faith once you’re in the trade and those target prices, if you see a stock that you’re in and it’s starting to struggle some, it’s starting to break down.

13:06
If I’m up 20%, I’m probably not gonna keep my stop loss at its original -5%. I’m scooting it up along the way.

13:14
Now, as I get more profits off the table, it affords me to have a little bit of a wider stop loss as well, because I’ve secured so much of the profits.

13:22
So that last ride or die, I have a lot more room. Maybe I’ll have like a 10% margin to work with from where the current price is to where it would Take Me Out on the trade, But that’s after I’ve already, you know, bagged 2/3 to 75% of the overall profits on that trade.

13:38
And then I let it keep going higher and higher, but at some point walk away from the trade, even if it hasn’t hit your target price, it doesn’t have to hit it if it’s breaking down technically, I don’t care if I have 10% left, I don’t want to be in the trade anymore.

13:47
And so you want to remember that with target prices, they’re they’re not something that you have to adhere to. Like it’s a stop loss.

13:56
It’s really guidance for determining whether or not it’s a good reward risk ratio on the trade and targets can change as well as you get more price action every day.

14:04
The stock is telling you a news story for the most part. You know there’s another candle there that you have to consider and whether that not that candle in the grand scheme of things, it changes your perspective of the stock.

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It might change the perspective of where the stop loss is. It might change where you think that it has the potential to go to for a target price.

14:17
So you wanna keep all that in mind and you also want to remember the pros and cons for the different stop losses that I mentioned here because each one has things that are really nice about it, like with Ricky’s where you’re basing it the number of shares that you buy based off the overall risk on the total portfolio.

14:38
That’s nice until something really bad goes against you on a trade and then you could be looking at a blown up account.

14:45
Whereas on the flip side of things, if a trade goes really well for you, you’re making a lot of money.

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And then my approach, obviously it’s more consistent, more boring, but you’re not going to have the wild volatility typically that you see with the other approach.

14:56
So if you enjoy this podcast episode, I would encourage you to give me a five star review on whatever platform you’re listening to. That really does mean a lot to me.

15:08
Keep sending me emails. ryan@shareplanner.com I do read them all. I do pretty much for the most part.

15:13
Unless it’s something that I just have no knowledge of, I make a podcast episode out of them. I really do like getting to hear your stories, your challenges, so send those to me.

15:23
ryan@shareplanner.com and check out swingtradingthestockmarket.com as well. Thank you guys and God bless.

15:29
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15:36
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15:44
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16:02
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.