Stop-Losses and Volatility | Podcast Episode #117

0:00
Hey everybody, this is Ryan Mallory with Swing Trading the Stock Market, and today we’re gonna do an episode and on a pretty interesting topic actually, one I’ve never, never really addressed before. I’ve kind of known it in my head all these years, but I’ve never really thought to do an episode even remotely close to it, and that’s volatility and stop losses and, and how do you set a stop loss based off of the volatility of a stock trade.

0:22
And so it’s a pretty interesting piece because it comes from a trader. This is an email podcast. If you’ve been listening for any time, you know, I take a lot of emails. So before I bury it into this podcast, I want to remind you guys, make sure to be sending me your questions for podcasts because I use a lot of them for podcasts.

0:41
Maybe I don’t get to it in the first week or so. Usually I get around to all of these emails, and if it got to where I was getting so many of them that I couldn’t keep up with it, I would just add more podcast episodes too because I want to keep up with these things. I want to address pretty much all of y’all’s questions. There hasn’t really been a lot of emails that I’ve gotten where I’m like, this isn’t even really a question where I can’t do an episode on this. Y’all’s questions are really good.

1:02
They’re very thorough too. Before I get any further, I actually do have a bourbon for this episode. This is, uh, what do we call this? This is American Honey, and it’s from Wild Turkey. And I gotta tell you, when I poured it, what was crazy about it is it is a really, really light color.

1:19
Like it’s definitely not a dark, dark bourbon at all, but it says it’s a bourbon. At first I thought, did I not buy a bourbon here? I saw this at Publix Liquors. I saw one of these samples for Wild Turkey American Honey. I’m like, I’m not gonna buy a bottle of it, but I’ll try it. I mean, I got a podcast. I drink on the podcast, so might as well do it.

1:36
So let’s try it here. Whoa. That is the sweetest bourbon I’ve ever had. I mean, I guess it’s living up to its name of American Honey. Exceptionally smooth liquor blended with pure honey and bourbon whiskey. So it sounds like it’s like a combination. I should have read that before I actually drank it. It’s good.

1:51
If you’re a person that doesn’t quite like the taste of bourbon, or you’re just starting out in it and you think, OK, this bourbon taste, whiskey taste, it’s pretty strong. I would say go with this American Honey, my gosh, I sound like a commercial for these guys. Again, they’re not paying me to do this stuff.

2:07
I’m just telling you. It’s tasty. It’s sweet. I mean, it’s probably the sweetest bourbon I’ve ever had and it sounds like they’re essentially mixing, yeah, I think they’re just mixing bourbon with honey because I think, I’m no expert on bourbon, but I mean, I’ve had a lot of different kinds of bourbons even just on this podcast, but I think bourbon has to be at least 40%.

2:26
And this says here it is 35.5%, 71 proof. So it’s probably above 40% and then they mixed it with honey, which diluted the content of the bourbon, right? This is Wild Turkey. I mean, it’s good. I mean, it is super sweet though.

2:42
I mean, it’s almost like a, gosh, it’s almost like a cocktail. I would almost say that it has that little bit of a hint of sweetness like an old fashioned would have. It doesn’t taste like an old fashioned though. This here tastes better than some of the old fashioned that I’ve had in the past. I mean, this is not bad.

2:58
It’s tasty. It’s just not really a legit bourbon. Like there’s no burn when it’s going down. There’s none of that. There’s no harshness to it. Super smooth, but it’s super sweet as well. By the way, I bought something off of Amazon that was pretty sweet.

3:14
And when you hear this, you’re gonna think, Ryan, that’s really bougie. That’s not something anybody needs. Contrary though, if you actually got these, you would be amazed by them. There are these filtration devices for creating crystal clear ice cubes.

3:31
Holy cow, dude, these things are awesome. They really are. I swear I’m giving like plugs for them. I’m not gonna mention any manufacturer of it or anything like that. I’m just gonna tell you they’re out there. They’re pretty amazing, and they give you these crystal clear ice cubes. I kid you not, it’s like you’re seeing through a window.

3:48
They’re pretty amazing. I just tried it out the first time last night, and it takes like 24 hours to make two of these things. And it was really good. I mean, there’s no flavor to the ice cubes, don’t get me wrong, there’s nothing spectacular or tasty about the ice cubes. It’s just like the look that it gives when you’re making an old fashioned.

4:05
You can’t even tell that there’s an ice cube in your old fashioned. It’s pretty crazy. And then if you look at it from the top down, you can see right through the bottom of your glass, like there’s this big clear square in your old fashioned because that’s how clear the ice cube is. It’s crazy. Anyway, check it out. If you’re into the ice that goes into your old fashioned, I know that sounds kind of crazy, but it’s kind of a cool thing.

4:26
Anyways, I’m getting a little bit sidetracked here. I know that I like to talk about the bourbons. The feedback that I get, it seems like you guys like talking about it too. I mean, we all trade in the stock market, we all have jobs, we all do things. It’s kind of nice to come home in the evening, have a bourbon.

4:42
I like to talk about what I’m having. I like to try different stuff. A lot of times I’m just going to places and trying their samples out and bringing some of them home. So that’s what I’m doing here. I’m not gonna buy a whole bottle. I actually may, I could actually see myself buying a bottle of the American Honey, not so much for me, but if somebody comes over like, ah, I can’t do bourbon, it’s like, well try this, you’ll like this, it’s not bad, it’s very friendly.

5:02
It’s easy on the palate. But in any case, this email comes from a person I’m not gonna use his real name. He did say I could use his real name. I just don’t know if I want to use that. I mean, I don’t know. Maybe these podcasts become super, super popular down the road 100 years from now when we’re all dead.

5:22
And I use his real name and society is just absolutely crazy and these podcasts are out there and they’re like hunting down his offspring or something. I don’t want that to happen, so we can’t do that. So we gotta use fake names, right? So I’m gonna use Judd. Judd, everybody likes a good Judd.

5:37
I mean Judd’s a good, who’s ever met a Judd that’s not a good guy, right? He’s like a man. In any case, Judd writes, I’m writing because I like your show a lot and I had a question. I’ll try to keep this short as I know you get some pretty long emails. You can skip straight to the bottom for the question. I’m not gonna skip straight to the bottom.

5:53
I’m gonna go through this email here. He says, I’m currently about 12 months from retirement after 20 years in the Navy. First off, thank you for your service, man. That is awesome. You served in the Navy. That’s one of my life’s biggest regrets, quite honestly. After 9/11, there was a part of me that really wanted to quit college and go into the military.

6:13
Obviously, life would have turned out a lot different because it would have been a completely different path than the one that I actually did take. But I felt like that was kind of my generation’s calling. 9/11 happened. I was 21 years old, and I oftentimes regret not going into the Navy.

6:29
That was the branch that I wanted to go into. So I did not go. But in any case, thank you for your service, Judd. Gosh, I hate calling you Judd when I know you’ve served our country, you deserve to be. You know what, his name’s Jake. Jake’s his name. He already said I could use his real name. Jake, thank you for your service, man.

6:45
I appreciate that. And you deserve the recognition for that, man, that’s awesome. Served for 20 years in the Navy and he has savings for retirement pretty much since day one. He says I have roughly $107,000 in my Thrift Savings Plan.

7:01
Great job. $27,000 in my mutual fund and $23,000 in a Roth IRA. My wife and I have roughly $110,000 in various savings accounts, which I have been trying to talk her into investing somewhere else. Also, depending on my VA disability rating, I could receive from $2,200 to $4,000 monthly pension disability benefits.

7:23
I’m unsure as of now what I would like to do in retirement, but definitely something blue collar as I’m an F-18 mechanic. There are plenty of DOD contracts and civil service jobs on the base as a fallback plan. Cool, man. What a dream that would be to ride in an F-18 or any kind of jet, right?

7:42
That would be awesome. That would be the ride of a lifetime right there. Anyhow, I have wanted to take a more hands-on approach to my investing for quite a while and took the March market drop as my opportunity. What a hell of a time to take an opportunity because that turned out to be pretty good.

7:58
I started on Robinhood and learned a lot about how the market works, but I’m in the process of switching to TD Ameritrade after noticing some things I don’t like about Robinhood and hearing several podcast hosts point out some similar flaws. Yes, there’s definitely some flaws there.

8:14
I have put about $2,200 in the stock market and was up about $500 on the year before I made a string of bad purchases. Happens to us all, bud. I was trying to trade the swings but bought in a little too soon on several positions. If I liquidated today, I’d only have a profit of about $160.

8:31
So I’m kind of holding on to hope that these companies don’t default or file bankruptcy. Gosh, I hope it’s not Hertz. Don’t tell me it’s Hertz, man. You’re gonna have to give me an email and tell me it’s not Hertz, and I’m not even gonna sleep tonight knowing that you might be in Hertz. My question is, when you buy into a stock with medium to high volatility, do you usually set a stop loss immediately upon purchase?

8:52
And if so, what percentage for a medium and high volatility stock? I have been using stop losses as a means to hold on to profits only and not upon purchasing positions to prevent big losses. Boy, that’s a hot take right there. I don’t know if I’ve ever heard somebody say that before.

9:08
That’s kind of interesting. Yeah, we’ll talk about that. This is how I went from $500 to $160 profit on the year. I understand. Thanks for the great show and I hope to hear your response on a future episode. Well, guess what? You’re gonna get my response on a present episode because if you’re hearing it right now, it is the present.

9:27
Regards, Jake. PS, I don’t mind if you use my real name. I did it. I broke my own rule, but gosh, you shouldn’t have told me you served in the military for 20 years because you deserved that recognition. I still didn’t use your last name, but at least you deserve not to be thanked for your service as Judd.

9:43
Judd’s gonna reappear in another episode. I’m telling you, I’m not letting go of him. I’m not wasting Judd as a name on my podcast. Judd’s next email I get, it’s gonna be Judd. I’m waiting for a woman to email me a good question because her name is gonna be Beatrice for sure.

10:02
Any case, man, I am on a roll with this episode. I don’t know what’s going on. I don’t think this American Honey’s 35%, quite honestly, because I am a little bit of a chatty Cathy right now. And 35.5% is not gonna do it. And let me remind you too that I have a pretty cool feature that goes hand in hand with this podcast.

10:22
If you like these podcast episodes, if you like learning, you’re gonna want to take some of that into the real world with your trading, and the best way to do it is by going to swingtradingthestockmarket.com. It’s my website. It’ll redirect you to my Patreon account where I post a lot of really good information.

10:38
All my research that I do throughout the week, I post it there. You have different tiers. If you just want market indices, you can get into that for like $5 a month. If you want the market indices plus all the FAANG stock updates plus Microsoft, plus Tesla, you can get in that for like $10. If you want all my watch lists and all the charts that I find interesting on top of everything else, you can get into it for $20.

10:59
So check it out, swingtradingthestockmarket.com. Really good feature, highly recommend it. If you have any questions, you can always email me about it. But so Jake here, good solid name too, like Judd. Jake, never met a bad Jake in my life. Well actually, oh, I’m not gonna say it because there’s one Jake I don’t like too much, somebody’s kid, but I don’t want to say anything about that kid because it could land me in some hot water, so I won’t do it.

11:27
Any case, not this Jake. This Jake’s pretty good. He says, again, my question, when you buy into a stock with medium or high volatility, do you set a stop loss immediately upon purchase? And if so, what percentage for a medium and high volatility stock? So this is a really good question because he’s struggling here because of this.

11:42
Now, I do take into account the volatility of a stock when I’m setting my stop loss. I can sometimes get away with like a 1 or 2% stop loss if it’s coming right up against a key trend line support level for a stock like Walmart or maybe even Home Depot or like a Dow 30 stock, right?

12:02
Minus some of those banks because the banks will stop you out in a heartbeat for no reason at all. But there are stocks out there that you can set like 1 or 2% stop losses on. I don’t necessarily like using a 1% stop loss because even the most docile of stocks can still stop you out on a 1% move and then it just pops right back up.

12:20
What I like to do is find key support levels, whether it’s a low volatility stock, a high volatility stock, or somewhere in between, find key support levels and place my stop loss below that. Now, if there’s a key stop loss on like Roku or I think one of the highest beta stocks out there right now, and for those who don’t know what beta is, it’s basically the average return against the S&P 500.

12:40
So the S&P 500 is like a 1. If it has a beta of like 1.5, which is pretty strong, that means it’s on average doing like 1.5 times the amount of the S&P 500. Overstock is like five times the amount of the S&P 500, so I haven’t traded Overstock.

12:57
I don’t know if I’ve ever traded Overstock quite honestly, but if I was to trade Overstock and there’s actually a setup on it at this moment that I’m doing this podcast, it’s hard to really do Overstock with less than a 10% stop loss, but I wouldn’t say that’s ideal. That’s a pretty wide stop loss there.

13:14
I mean, because in order to get a 2 to 1 return, you’ve got to get 20% on the trade and yeah, I can probably do that, but is that really what you want to do, to think that OK, in order for this to actually be a good trade, I need to make 20%? Not many average trades are gonna net you 20%, but with something like Overstock, I couldn’t see myself getting into it with more than like a 5 or 7% stop loss on that trade.

13:37
Meanwhile, you take a stock like Visa or you take a stock like Johnson and Johnson, yeah, you might do like a 2% stop loss on it because you can get away with that. Yes, you still may get stopped out of it. That doesn’t mean you’re not going to get stopped out of trades, both low volatility, high volatility, and somewhere in between.

13:56
But you can do it with confidence. And so I do set a stop loss immediately upon purchase. Now, here’s the caveat. I don’t do it as good-til-cancel. I put my stop losses in every day after the market opens because I don’t want to get some kind of crazy bid-ask at the open where they go below my stop loss and it triggers me out of the trade.

14:13
That happens and it happens within milliseconds of you even realizing it. You don’t even see the bid and ask flash. It just flashes. It’s like a flash in the pan, you don’t even see it, and all of a sudden you just find yourself stopped out and you’re like, why was I stopped out? So I actually place my stops after the market opens because I don’t want to get stopped out right at the open there, and I’ve never really had a problem with it.

14:34
It doesn’t mean that there can’t be a problem with it. I’ve never had a problem with it. But regardless of whether or not it’s a low volatility stock or a high volatility stock, you have to put stop losses in. I mean, that’s the only way you can control the risk. You can’t wait till you have a profit. That’s probably the time where the stop loss, even though it’s insanely important at that time, it’s far more important that you have it at the beginning.

14:54
And like this person said, he went from $500 to $160 in profits. And why did he do that? Because he was getting torched by his losing trades. And it sounds like if I had to guess, he’s probably using some high volatility trades there. Maybe it’s Overstock. Maybe it’s Wayfair or Restoration Hardware. I’m not saying that those stocks are actually all gone up pretty well except for Overstock.

15:14
Well, Overstock went from like $1 to $120. But it’s pulled back an insane amount, like a big, big amount, and it’s trying to bounce now. But nonetheless, you could have lost your hide on that. And here’s the other thing, he makes this comment about, I’m kind of holding on to hope that these companies don’t default or file bankruptcy, but here’s the thing.

15:35
I don’t know what stocks they are or if they’re gonna file bankruptcy. Please tell me it’s not Hertz. But if it is or if it’s some other company, hope is not a basis for staying in a trade. Hope is usually what creates bigger losses. So, for somebody that’s up and everything like that, you’re still not falling behind by getting out of the trade. You’re still up $160.

15:56
Maybe it shoots back up to the $500 and you can make back that money. I don’t know, but what I’m just trying to say, and I’m not directing this at him, I’m just talking about this theoretically, stocks go up and down after you get out. It doesn’t matter if you’re still long on it or not, it’s gonna go up or down, whether or not your stop loss is hit or whether you just decide to book profits.

16:17
And so what gets traders all hung up is that they get out of a stock at $110, they bought in at $100, they make 10%, and then they watch it go up to $130 a share, and they’re like, oh, I should have held on to it longer. I would say that about every one of my trades that I make, should I have held on to it longer? Why?

16:33
It’s not that I’m trading bad. It’s just because stocks go up, stocks go down. And at some point, the stock’s gonna make you say, oh, I should have held onto it longer. And then what do we do when we say that? We start adjusting our trading strategies that are profitable and making them unprofitable, and you don’t want to do that. You don’t want to stay in a trade because last time you should have stayed in the trade and could have made more money.

16:53
No, you don’t want to do that. You’ve got to follow your stop losses. The time that you’re the most rational about where to place your stop losses is when the market’s not open and when you’re not in a trade. That’s the time you’re gonna be the most rational in your trading because you don’t have anything at stake. It’s kind of like paper trading at that point.

17:10
You’re mapping out a trade that you have no stake in yet, so you’re going to be rational about it. It’s when we get into the trade and we start taking losses or start making profits that we turn into Jojo the idiot clown and we start making bad, bad decisions. So Jake here, he’s trying to say, hey, do I adjust my stop loss depending on if it’s a medium volatility, low volatility, or a high volatility, and yeah, you have to be cognizant of that.

17:32
You can’t go into a Roku with a 1% stop loss. Maybe you can pull that off with Johnson and Johnson or maybe with Walmart, but you can’t do it with Roku. You can’t do it with Overstock. I’d be shocked if Overstock, I haven’t looked at it before, but I’d be shocked if the bid-ask price is at a 1% spread on that stock.

17:48
But you have to be cognizant of that. Most of the time, it’s very difficult to use a stop loss that’s less than 2 or 3%. There are some stocks out there that buck the trend, but like Apple, you could probably get away with a 3 or 4% stop loss. It doesn’t mean you won’t get stopped out, but you could still make a profit doing that.

18:06
And if you’re good at technical analysis, you can probably use a tight stop loss on it, maybe not in 2020, but in previous years you could have. There are a lot of stocks in 2020 you can’t use a 3 or 4% stop loss on. But on the flip side, the rewards are much bigger too. So stops are bigger, rewards are bigger, so you can still go for that 2 to 1, 3 to 1, or more on the trade.

18:31
With Overstock, for instance, a high beta stock, we already said it’s like a 5. You probably can’t do more than like a 7 to 10% stop loss on that stock. I think I might have said 5% earlier, but as I’m doing this podcast right now, it’s probably more than 5%. It’s got to be somewhere between 7 to 10%. However, on the other side of the equation, you could probably make 14 to 20% on the trade if it makes a big move in your favor.

18:51
So that’s one thing to consider. The stop losses are tough. I don’t like using stop losses of 10%. I’m usually like a max 8 maybe 9% on my trades. I have to have a lot of confidence in the trade setup, and if I’m using like an 8 or 9% stop loss, I’m looking for the first opportunity to tighten that stop loss up.

19:09
I got into Apple this week, I think it was like 108.51, still in it, and I’m using a stop loss of like 101 something. I don’t have it in front of me right now, so I don’t know what it is exactly. But after the first day, I think I tightened it up to like 103 and change because I wanted to find the first opportunity that made sense to raise the stop loss, and that’s what I did on Apple.

19:31
So here’s the thing, Jake, and for everybody listening. Using stop losses as a means to hold on to profits only and not using it for purchasing positions to prevent major losses, that’s a bad move. You don’t want to do that. You want to use stop losses all the time, all the time.

19:49
Reason why is because things happen in the stock market. Just look at Nikola this week. It just dropped like 20–30%. What if that happened during market hours? What if that news leaked out early and all of a sudden, you’re sitting on the pot, you know, taking care of business and you’re away from your computer, not using a stop loss because you’re not profitable yet.

20:11
You come back and it’s down 30%. Well then you don’t want to be holding on to hope that this Nikola position where it has a CEO that allegedly believes in kissing cousins kind of a thing. Allegedly, allegedly. I noticed everybody says allegedly, so I should probably say allegedly when I say that because I don’t know, maybe you get sued for that kind of stuff.

20:31
I don’t know, but I’m not implying, I’m not saying that he’s doing that. It’s allegedly, it’s being alleged that some serious hanky panky is going on there with first cousins. I don’t know exactly. I haven’t read about it. The reason why I don’t know what exactly it is, I don’t want to know.

20:48
But in any case, it’s affected the stock, right? The guy resigns, stock’s down, shareholders are taken to the woodshed. You don’t want to be on the pot. Golly, where the heck is this conversation going here?

21:04
You don’t want to be on the pot and then come back and realize, oh crap, I should have used the stop loss. So, use the stop losses. I use them all the time, every day. I put them in at the open, you should do the same thing. If you enjoyed this podcast, make sure that whatever platform you’re listening to it on, that you’re liking it or following it or leaving a good review. I really appreciate the good reviews.

21:20
The reviews mean everything. I’m really putting my heart and soul into this podcast and I appreciate you guys listening. A lot of you guys write me and say I’ve listened to every one of your podcasts, which is literally 116 episodes. Not sure I could do that, but that’s amazing that you guys do.

21:35
It’s literally one of the most flattering things people have ever said to me before, that they’ve listened to all these podcasts. So thank you so much for that. Thank you guys for your loyalty. Check out swingtradingthestockmarket.com and let me know what you think. If you have any questions, feel free to send them my way. Guys, God bless you all and thank you.