Good Faith Violations | Podcast Episode #394

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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 SharePlanners, Swing Trading the Stock Market and today’s episode we’re going to talk about good faith violations. We got a guy here, he’s a California guy.

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He’s grown up in Northern California and like with all podcast episodes, I don’t use their real name.

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Instead, I give him a usually a Florida redneck name unless they specify otherwise. This case, he wants me to give him a California name, and the only one I can think of.

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I’ve only been to California a couple of times and it hasn’t been in the last decade. So I’m gonna give them the name Ken from that Barbie movie, which by the way, I’ve not seen, will not see.

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Nobody in our household has seen.

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Ain’t gonna see that thing. But in any case, I am old enough to remember kids playing with dolls, not me, but others.

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And there was a Ken, the Ken and Barbie dolls, right? So we’ll give him the name Ken.

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Ken is a California name. I think Barbie’s all about California or something like that.

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So in any case, Ken writes Ryan, my name is Ken. I am a 30 year old single father of three kids under the age of six.

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Wow, that’s a lot. Born and raised in Northern California, so if you use my e-mail in a podcast, feel free to give me a California bro name rather than a Florida man name.

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Sorry in advance for the long e-mail.

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That’s good. I want to hear your stories.

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People want to hear your stories too, so there’s no problem with that, he continues with I started trading in early February 2021, mostly due to the GMB pump in late January of that same year.

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Not that I participated thankfully in it. I just heard about it in the news and it piqued my interest.

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Not knowing any better, I downloaded the Robin Hood app and put $50.00 in it for the first couple weeks.

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I yellowed that $50.00 into all sorts of dumb stuff from Dogecoin to TLRYI quickly realized I knew almost nothing and dove into Investopedia, podcasts and YouTube to shorten my learning curve.

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I was lucky to find Swing Trading the Stock Market podcast and after a couple weeks I had listened to every episode.

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I would wake up in the morning to your voice in my head saying you have to manage the risk. I have also since joined your Patreon and I’m more than happy with my subscription.

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So much good analysis and information that I just don’t have time to do on my own. Well that’s great and now I don’t even have to plug it now.

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Since then I have essentially traded sideways. I took $50 from my Robin Hood account and moved it to a Weeble account.

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I still not the best but I put about $2500 into that account to play around with. I have been up as much as 1% and down as much as 1 1/2% partly due to market choppiness and the

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other issue I have run into has to do with the good faith violations. I am curious to hear your advice on how to deal with them when trading with a smaller account.

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My great trades, mostly from your recommendations have been wiped out by dumb decisions. 1 penny stock, CTRM, never again with a penny stock and coin.

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Yes I know I listened to your podcast just after I bought it and swore at myself for the whole episode.

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Also not being able to honor my stop losses due to the fear of a good faith violation. So by the way, I didn’t say anything about CTRM.

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I don’t do any penny stocks just so that doesn’t get confused in there as he continues to write. I am not sure or I’m not 100% sure if every trading platform has these good faith violations, but

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essentially I will buy a stock with unsettled funds and it limits my ability to sell said stock unless two or more days have gone by.

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This has bit me two or three Times Now. For example, I bought one share of Tesla on April 13th at $724.

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This was pre split and wrote it up to $780 the next morning only to watch it plummet back down to $732.00 erasing all of my profits when under my trading plan I would have caught the lion’s share of

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the move. That was the worst example as some of my biggest losses were on the trades that I wanted to get out of so badly but didn’t want my account suspended for 90 days, which is Weeble’s policy for the third good faith violation when I can be.

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I am religious about my stop losses being a fairly risk adverse person, I know likely the smart thing to do would be to put more cash into the account and leave a portion and cash so I don’t have

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to worry about unsettled funds. That makes it tough to put on any remotely decent sized position.

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Or could I potentially change platforms? But I do like the user interface on Webull.

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Most of the time I rely on your trading setups and follow the daily charts for those stocks and when they seem poised to break out, I will buy, usually with a stop loss of no more than two to 3%.

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Also, Weeble will not honor the stop loss if it means you will get hit on your third good faith violation.

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I just noticed this when I got notification that my advanced order was canceled as a stock plunged below my stop loss.

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Again, love the podcast and the YouTube channel. Looking forward to your advice?

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Feel free to rip me a new one. I can take it.

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Thanks for your time. Sincerely Ken.

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Now here’s The funny thing about this e-mail. This was from April 30th, 2021.

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It showed up in my e-mail account. I was trying to clean things up and everything and it showed that I never read this e-mail and

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usually that never happens. And so yes, can that happen?

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Sure, I’m human. The amount of spam that I get on a daily basis from people wanting to sell me a new software for

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SharePlanner happens all the time. But being true to this guy’s great e-mail, hoping that he still listens to the show, and if you do,

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send me an e-mail telling me that you actually got to hear it. I went back through the all the episodes during that time, could not find any episode like that.

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So hopefully this isn’t like a repeat episode. Also coming up on 400 episodes, can’t really remember every episode that I’ve done, so this one was

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an unread e-mail. I’m assuming that I haven’t done this before, but nonetheless, even if I have, it should be.

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It’s still pretty interesting because I might have a different angle to it than I did, say, three years ago.

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So in honor of the GameStop era when this e-mail was written, and considering the fact that he got his start during the GME pump from that year, let’s talk about these good faith violations as it

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pertains to a video game, right? So imagine that you’re into buying and selling video games and the stock market.

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People obviously buy and sell pieces of a company that we call stocks, right, hoping to make a profit.

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But there are rules that follow, Just like in a game that you might be playing, A good faith violation in the stock market happens when you buy stocks but then sell them again before you’ve actually paid for them with the money that was supposed to be in your account.

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It’s like buying a video game with a promise to pay later, then selling a game to someone else before you’ve paid for it yourself.

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This is a no no because it’s risky and goes against the rules.

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If you do this once in the stock market, you might get a warning, or if you do it with a video game, you might get a warning.

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But if you keep breaking the rules the brokerage firm where you buy and sell stocks, it might put you in a timeout by suspending your ability to buy or sell stocks for a while.

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This is a make sure that you have the money to first before you buy anything.

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So a good faith violation is a reminder to pay your broker for your order that you bought the stocks that you bought before you go about selling that stock.

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So the cash has to settle when you buy a security and sell it before those funds have fully settled, and they usually take a couple days, then you’re breaking the rules of a cash account, and you do it enough times, they’ll suspend you.

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So is there a way around it?

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Yeah, there is.

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It’s a margin account. You have to get a margin account to prevent this.

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So switching to a margin account can help you avoid good faith violations. But it’s like playing the stock market on a more advanced level with its own set of risks and a cash account.

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You need to use the actual money that you have to buy stock, and you have to wait for that money to settle and become officially transferred after you sell the stocks before you can use it again. This is where good faith violations happen if you sell stocks before your money has settled.

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A margin account is different though.

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It’s like the brokerage firm gives you a loan to buy more stocks than you can afford with your own money.

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This means that you can buy and sell stocks without waiting for your previous sales to settle because the firm is covering you in the meantime.

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Going back to the video game illustration, it’s a bit like borrowing coins from the game’s bank or to buy items that you need right now, even if you don’t have enough coins at that money.

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Or I guess in the Fortnite world it would be like V bucks.

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But just like borrowing money in real life, there are risks that the stocks you buy with borrowed money lose value.

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You could end up owing more money than you have. This is called a margin call, and if that happens you’d have to put more money into your account quickly or sell some of the stocks at a loss to cover the debt.

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So with a margin account, it does open up the temptation to trade with more money than what you have in an account.

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Usually for swing trading purposes they’ll give you 2 to 1.

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So you can go 100% into margin or 200% long with your account based off of margin. And when you do that, they’re not gonna lose their money first.

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So if you’re let’s say you Yolo into a stock at $100 and you put all of your money into the account, you’re 200% long on it and that stock drops 50% overnight from earnings.

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Let’s say you bought Snapchat or something and held it into earnings. Guess what?

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You’re not equally losing money. You’re not like a partner with the bank.

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The bank’s basically just giving you the liquidity. But as soon as you drop 50%, you’re wiped out.

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You have no more money in your account and they walk away with all their money. And if you go beyond a 50% drop on a 200% trade and then you owe the bank money, just how it works.

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Do I trade with margin? Yes, because I don’t want to deal with the good faith violations, but I don’t trade beyond like 100% of what I have ever.

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I just don’t do that.

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And margins necessary for other things too. I mean you need margin if you’re going to short the stock market, you need margin for many other things as well.

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So for swing trading you don’t wanna be weighed down by the good faith violations.

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You need a margin account. Now you can’t just open up as many margin accounts as you want.

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Most brokerages will limit you to like 1 margin account per person. Now going into some of the other issues here that Ken is having, he says a couple of things that catches me off guard.

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He says when I can be, I’m religious about my stop losses being fairly risk averse person and I’m thinking to myself what when I can be? I’m being religious about my stop losses.

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Look, I’m a Christian and I’m not a Christian when I can be. I’m a Christian all the time.

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And it’s kind of like with trading. You don’t use stop losses when you can.

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You have to use it all the time. Always use stop losses because things can go wrong in the stock market.

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It can go wrong when you don’t think that anything could go wrong. Just yesterday I was doing a live stream on the trading block and I was talking about Apple.

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It’s like, you know, Apple’s trading below the 200 day moving average today, the last five or six times it’s tested the 200 day moving average.

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It’s done an incredible job of recovering, even if it dips below intraday before the close. But now we only got like 42 minutes left at the trading session.

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This, this is literally what I said. We only have like 42 minutes left of the trading session.

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Apple’s well below the 200 day moving average. It would take a miracle for the stock to get back above the 200 day moving average.

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At this point I don’t see it happening and for the next 38 minutes I was spot on about that. Then at 3:56, with four minutes left of the training session, there was some AI news that broke that

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they’re trying to compete with Microsoft on the AI front and that stock shot right through the roof and recovered most of its losses on the day and more importantly recovered the 200 day moving

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average. The reason why I bring up this illustration is that things happen that you think there’s no chance of that possibly happening and then all of a sudden it happens.

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And so when that happens against your interests in a stock that you might be holding and the stock goes down, man, you’re going to be thankful that you had that stop loss in.

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I mean, how many people were probably shorting SMCIA month ago at 300 thinking, OK, this thing’s gone way too high and they put a short position on and let’s say they have a stop loss at 3:30 and

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then that thing just goes straight through the roof. Was anybody really expecting them to go from 300 to over $1000 in the course of a month?

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No, but it did. And that’s where people get wiped out. It’s like, no way it’s going to go from 300 to 400.

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Oh, crap. Now we’re at 10:50. See how bad it can get? You’ve got to have stop losses because they prevent the wars from happening.

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People got wiped out on that move with SMCI. If they were shorting it and they had no stop losses, if they didn’t manage the risk, they’re done for.

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So stop losses. It’s not about being adamant about using stop losses when you can be or when it’s convenient for you.

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You got to do it all the time. Some other thoughts too pertaining to Ken’s trading.

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He’s ignoring stops at times and and he gets mad when he does. He ends up losing money.

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But why? Why is he ignoring the losses?

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Why is he ignoring his stops? Is it because he’s afraid to lose?

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Often times that’s what the case is. It’s either you’re afraid to lose or you’re afraid of it going right back up.

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If you’re afraid of it going right back up, then stagger your stops. Something that I’ve been doing more just be able to optimize my time in a trade.

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I’ll take partial losers and that’s also helped my reward risk ratio as well.

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So I’ll stagger my stops. And on the back end, let’s say you’re taking a third, a third and a third on a losing trade. That also allows you to be able to take a little bit wider of a stop loss to the downside.

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Not that you have to, but let’s say that you didn’t feel comfortable going outside of 4%. Well, staggering your stop losses allows you to go beyond like maybe like 5 or 6% if you really wanted to.

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Because when you average out the loss, it’s gonna be like somewhere around 3 or 4% probably.

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So that’s one alternative, right? If you’re afraid to lose and you’re ignoring your stop losses, that’s a critical trading error there, because trading is about losing a lot.

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You’re going to have many, many losing trades.

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I’ve had tons of them. I still have tons of them, but I also have winning trades.

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So the losing trades are gonna happen. It’s just part of the game.

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And staggering your stop losses to the downside too, can’t help a lot. I mean, I know for instance, if you look at some of the volatility in the market over the past week,

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you had Toll Brothers that had a breakout on Monday, and then you had the CPI report on Tuesday, and you had this massive gap lower that completely ruined the trade.

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If you took a third out of that trade following that initial reversal, yeah, you’re left with 2/3 of a position, but you didn’t get out of it completely.

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And the next day it goes right back up and breaks out again. And ultimately, you still have to have that line in the same.

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This is the farthest that I’ll let a trade go against me. So let’s say you get into a stock at $100 and you have a stop loss at 95.

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And yeah, if it breaks out and comes back down, goes from like 101 or something back down to $98 a share, yeah, you’ll go ahead and take a third out.

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If it goes down to 96, you’ll take another third and then you’ll close out the position at 95. But let’s say instead the market gap’s down the next day or the stock gets downgraded and it’s

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trading at 95, you go ahead and get out at the full position. Yes, you still have to have that line in the same.

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You don’t start taking a third there at that point in time. No, not at all.

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But one, I think some at times staggering your losses. Can one, give you opportunity to reverse a loss ultimately and two, can actually shrink the amount of risk that you’re taking on each trade.

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Another thing I would say too, if you’re trading with like a $2500 account and you’re trading a stock that’s trading at $700.00, you can’t really do that if you’re trading a stock that’s trading at that high of a level.

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So at Tesla this is pre pre split days trading at 700. You have a $2500 account, one share that’s you know over 25% of your account.

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Go 2 trades you’re talking about more than 20, more than 50% of your account. So if you want to get out in thirds you’d have to like go over 75% of your account in that trade and that’s not a good thing.

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You don’t want to be like 7580% long on a stock and then you’re gonna run into those good faith violations as well.

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So trade, like maybe some lower share prices. Doesn’t have to be dramatically lower, but it can be like $100 a share. There’s plenty of $100 stocks out there that you can buy.

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And so good faith violations, just to wrap this all up, yeah, they can be frustrated. I wouldn’t do swing trading from my own perspective.

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I wouldn’t be doing swing trading unless I was doing it with a margin account. I don’t think GFB’s become as much of an issue if you’re using your account for long term investing,

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but it can be for sure with swing trading or day trading or scalping. And yes, I’ve had good faith violations in the past.

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They’re frustrating, they’re stupid. You would think that with the advancements in technology, they could figure out how to make the whole settled cash thing, you know, a thing of the past and make it more instantaneous.

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But but the banks are lagging in that area and there’s nothing we can do about it.

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So, and if you enjoyed this podcast episode, I encourage you to give me a five star review. Those things do mean the world to me.

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I read them all and I really do my best on these podcasts. Prepare and to present you with my view of the stock market.

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Also, send me your emails, even if it takes me three years to use it in a podcast episode. Which I swear that’s an outlier.

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That does not happen. But in this case, I found it and I was like, OK, I can’t see where I ever used it.

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It was an unread e-mail. I’m gonna go ahead and do it.

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That’s an abnormality. But I own it though, so keep sending me your emails. ryan@shareplanner.com.

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I will fake podcast episodes about them if you send it to me about taxes. I get a lot of emails about taxes right now.

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Guys, I’m not an accountant. I just give all my trading data to my accountant and he figures it all out.

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But anything else besides taxes I usually can talk about. Thank you guys and God bless.

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Thanks for listening to my podcast Swing Trading the Stock Market. I’d like to encourage you to join me in the Share Planner trading block where I navigate the stock market each day with traders from around the world.

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So go ahead, sign up by going to shareplanner.com/trading Block.

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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.