Tightening The Risk On Trades | Podcast Episode #501

0:00
Hey everybody, this is Ryan Mallory with shareplanner.com’s Swing trade in the stock Market. In today’s episode, we’re going to talk about some different factors as it pertains to risk. We’re going to be talking about moving those stop losses up. We’re going to be talking about how and when I decide to do that. Also, is there any reason for me to play options?

0:17
And how does that relate to trading reward and risk as well? So this guy here, he’s from Canada, and he asked me to give him a good Canadian redneck name. I can’t really come up with too many rednecks. I’m not even sure. Is there rednecks in Canada?

0:32
I could be wrong, but I don’t know of any. So I’m going to give him a good legendary Canadian name and that is going to be the name of Gordon, the great hockey player. Now, I could have done Justin, but do I really want to be, you know, doing Justin as a name?

0:52
Because that guy is legendary for all the wrong reasons. So I stayed away from that, stayed away from the politics of it and just went with Gordon. Hey Ryan, a long time listener, first time emailer here. I’ve been following your podcast since 2022 and I’ve had a few questions I was hoping you could touch on.

1:09
I’m from Alberta, Canada, so feel free to give me a good Berta redneck name. I could have just gone with Berta. Berta would have probably been good. You know what? Screw it. I’m going to go with Berta. You know, no longer known as Gordon. We’re going to call you Berta. I like Berta.

1:25
I’ve done Bertha before, but not Berta. So you’re the first Berta on the show. Anyways, so he’s listening to this for the first time. Like, what the heck is he doing here? I promise. I do talk about swing trading. I just, I don’t conceal or I do conceal everybody’s identities.

1:43
I don’t use their real names and so I I give them a good Florida red nickname usually, but since this guy is from Alberta, Canada, we’re just going to call him Berta. Any case, Berta continues to write. First, I was wondering if you trade options at all, and if so, do you prefer selling options or buying them?

2:00
And when it comes to option buying, what how do you calculate risk? I’ve been using the full premium as my potential loss, but that means the option would have to double in value just to achieve A1 to 1R multiple, which seems pretty unrealistic in most cases.

2:16
On trade management, how many open risk compositions do you typically have at once? Trades where the stop hasn’t been moved to break even? Also, what’s your view on moving stops to breaking? If you do, when’s the right time? And finally, once a trade is deep in the profit, what’s your trading strategy?

2:35
For example, do you use Emas, trend line breaks or hourly daily pivots? I really enjoy listening to your podcast and my commutes and appreciate the time and insights you share with the trading community. Thanks again, Berta. OK, so there’s, there’s a lot time back.

2:52
I’ll, I’ll start off with the option stuff because I’m not going to spend too much time on that. But I do think that they’re saying there is some good things that we can discuss. He Berta brings up a really good point and that is that if you’re going to use the risk premium as you’re, you know, absolute risk on the trade, meaning that you could lose the entire premium, which really when you’re when you’re trading long on calls or or puts, you should assume that you can lose the premium at any time, especially if they’re short dated option contracts.

3:25
You get a four or 5% move, you can be completely out of the trade. So it’s good to assume that you can lose all that. Now the problem is, and it goes along lines of what Berta’s saying here is, is that if that’s the approach that you take, where the ultimate risk that you’re taking on the trade is losing the entire premium, then you need just to get a 1 to 1, you need for it to double.

3:45
If you want the typical 2 to one, which is what I always try to at least get on my trades, then you need it to triple and value. And, and like Berta says, it gets very unrealistic at that point to assume that you’re going to triple every one of your options or that you should even go into the trades expecting to triple your options.

4:02
Because let’s face it, you can go into a trade with a 2 to 1 expectation, but it doesn’t always end that way. Sometimes it may be only just one to one or even like 1/2 to one, but you need to be able to go into those trades with a realistic expectation that that can be achieved. Now I do use options sometimes more, more, more times than not, it’s it’s going to be in my long term portfolio.

4:24
I’ll sell calls against the position if, if the opportunity is right. But even then it’s, it’s pretty scant. I don’t do it. I mean, oh, look at option calls, but I never can really bring myself to want to pull the trigger on them. So I don’t do that very much.

4:41
And of course, there’s a time element with options too. I am not a huge fan of having to try to get the trade to do what it needs to do within the time frame of that options contract because they do expire obviously. And as a result, that just adds another element to my trading setup that is working against me.

5:02
And then of course, if it’s out of the money options that you’re trading, as you get closer to that, that contract expiring, if you’re not in the money, you’re losing, you’re losing some premium pretty rapidly there. And so that time element can work against you quite a bit. So it’s good to assume that you’re you’re going to lose the entire premium, especially if you’re trading out of the money.

5:24
But in in the same sense, that amount of risk requires that you get a double or a trip will just even be able to justify the trade. Really, you have to triple your money to justify the trade. So the reward risk ratio doesn’t add up for me. Now for the meat and potatoes of this podcast.

5:40
And that’s going to be the trade management of how many? First off, he asks, how many open risk on positions do I have at one time? One of the things that I tried to do and I, I, I live by this saying that says if you test the water of both feet, you’re going to sink to the bottom.

5:58
Now, what do I mean by that? Well, if you go to a pool, you know, whether it’s yours or a community one, whatever it might be, it doesn’t really matter. But if you test it, the water you’re always doing with one foot. Why? Because if you do it with both, you’re going to be in the water, you’re going to go straight to the bottom and you don’t even know if the water was cold enough to or warm enough to jump in.

6:18
It’s Florida needs to be warm enough. I guess it’s for everybody. It needs to be warm enough. But yeah, if you test it, you’re you, you have to make sure then the only way you can do it is with one foot. But so many times and trading, we’re testing the waters with both feet.

6:34
We don’t really want to build up a portfolio positions. We just want to go all in. If we have $100 in our portfolio, we are going to be trading all $100. If it’s 1000 all 1000, that’s not the right approach because again, we want to, we need to assume that we’re going to be wrong quite a bit in our trading.

6:53
And as a result, you don’t want to just be jumping into the market with this strong conviction that the market’s going to go your way. Because if it doesn’t, then you need to be able to manage the risk. If you have a full portfolio of positions that you got all into at once or you’re going into a very into a trade with a very large position size, you’re not giving yourself that opportunity.

7:14
So it’s important to gradually ease your way into the market. Now what I’ll often do is, you know, if I get in the stock ABC at 100 and let’s say that’s the first position I’ve added to My Portfolio, I’m bullish on the market and the market continues to go up, then I’ll add another position.

7:32
But what I don’t want to do is just keep adding position after position after position. And I’m not really making any progress on any of those positions. They’re just kind of spinning their wheels and I’m not making any gains because then I’m just increasing my risk without actually making any profits along the way. So as those, the earlier stocks that I get into along the way, when they increase in value, that opens up the door for me to add more positions.

7:55
I’m taking profits on those early positions. I’m adding new positions in hopes that I can take profits on those along the way as well. I’m taking third. Usually I’m doing it in 1/3 increments. So that’s, that’s one of the big deals that’s important to me.

8:11
And some people don’t know why I’ll pass up on good trade setups because sometimes it may be that I have too many positions in My Portfolio as it is and I don’t want to continue to add more exposure without those first improving and profits. And so that goes back to how important trading is, that it doesn’t just revolve around good trade setups, it revolves around good trade practices.

8:36
And that’s one of them is just not getting too long too quickly. Now in a, in a good market, I’ll have more long positions. In a, in a bad market, I’ll have far fewer long positions. You take this market right now, I know that it’s trading at all time highs, but I’ll have far fewer long positions as a result of it trading at all time highs because the breadth isn’t there.

8:57
The market breadth has been very poor of late. So I’m not getting as many long positions in there right now because really the whole rally comes down to the mag 7 stocks or the all the the major mega caps like Broadcom and NVIDIA and Meta and Amazon and Tesla and Google.

9:14
I know Meta just took a pretty good whack from its earnings, but it’s those stocks there, it’s those big semiconductor plays, it’s Apple, it’s Microsoft. Those are the ones that are really dictating the terms right on the market. In fact, some of the worst breath readings, actually not even some of the worst, the worst breath reading on a positive day going all the way back to 1990 that we’ve ever seen in the stock market.

9:38
You had over 80% of the S&P 500 declining while the S&P 500 was as a whole was managing to rally. And so when I see those kinds of internal readings, just because the market’s rising doesn’t mean that I need to be increasing my exposure either because I’m seeing these readings in the market where 80% of the S&P 500 is going down, yet the markets going up, it’s a major divergent, it’s a red flag.

10:03
And so I’m not going to be as aggressive getting long on a market in those circumstances. Now you go back to August and September, completely different circumstances. I was in WDC, that sucker was up like, you know, 6070% at various times of the trade.

10:18
And so I was able to, you know, not just trade that, but I was trading Datadog, I was trading Walmart and another position. Some positions didn’t work out. You know, I traded gold. That didn’t work. Surprisingly, it didn’t work out. He looked back at gold. It was like right before it went on an incredible rally.

10:34
But nonetheless, I was a little bit early to that one. So you want to make sure that and, and in that time, August and September, the breath was much better. We were seeing breath readings where 60 plus percent of stocks are trading above their 40 day moving average.

10:51
Right now we’re seeing where it’s like 31% and we’re sitting at all time highs. That’s not a good sign. So how, how many stocks or how many positions I’m willing to have, what you’ll end up seeing when I’m the most bullish, you’ll, you’ll probably see like 8 or 9 or 10 positions in there.

11:08
But all those positions aren’t equal because the earlier positions I’ll probably have taken a lot of profits on. I might be down to like 1/3 of a position and those and then those middle positions that I added along the way, those are probably going to be like 2/3 of a position. And then the most or newest positions that I have, they’re going to be like full positions.

11:28
And another thing that I would suggest is checking out the self-made trader. If you go to shareplanner.com, check out the self-made trader. You can find that by clicking on at the top of the screen where it says trading Academy, you’ll see the self-made trader. You click on it. This is my life’s work.

11:44
It’s everything that I know about trading. It took me about four years to develop this course and it’s over 25 hours of videos. I’ve edited them myself to make sure that I’m, I’m teaching the stuff that I, I want to be taught that that it was very painstaking process, but it was it’s been a really rewarding for me too, to be able to see people take the course, to be able to learn from it and to really just grow as trader.

12:07
So I highly encourage you checking that out, the self-made trader, you can find that by going to shareplanner.com and in the process you’re supporting this podcast as well. So we talked about making sure that we’re aggressive and very bullish markets. And bullish markets doesn’t necessarily mean just because the stock market’s up.

12:26
We’re in a market right now where we’re seeing a lot of divergences where if you’re not really trading the MAG 7 stocks, there’s really nothing else that’s going up. You know, there’s some here and some there, but by and large, 80% of the S&P 500 is trading to the downside. You’re seeing days where the tech is trading 1% higher, but over, you know, 2/3 of the tech sector is actually trading lower.

12:48
You’re also seeing situations where the RSP, when you compare it now, if you don’t know the RSP, it’s an ETF of equal weight of all the stocks in the S&P 500. So you take SPY. SPY is going to be like NVIDIA has like a 8% exposure and Microsoft has like, you know, 6% exposure.

13:07
And I think Apple’s somewhere close to that as well. And then you get down to the, you know, stock 500 and it might have like .1% influence or exposure to the S&P 500. So it’s market cap weighted RSP is the exact opposite. Whether your stock #500 in terms of market cap weight or stock #1 being NVIDIA, you’re, you all have the same exposure to that ETF.

13:32
It’s an equal weight. But you know, across all 500 stocks, that’s actually continuing to struggle, even though SPY is going higher. In fact, you had one of the worst divergences that you’ll see in it where it was trading like .6% lower or .8% lower just the other day, while the S&P 500 or SPY was trading .4% higher.

13:53
So you can get some crazy divergences like that and that should help you to better understand and dictate how aggressive you want to be in the market when you’re seeing a lack of broad participation. That’s one of the first telltale signs that you’ll that you’ll see.

14:08
So when it comes to the risk management of these trades, am I using trend lines or am I using pivots or or whatnot for, for instance, pivots? That’s more guidance on a day-to-day. I don’t really place my stop losses based off of the daily pivots. What I’m really doing there is just really setting the expectations.

14:27
If I see a stock that opens up very strong and it’s going right up to that R3 pivot level, it gives me an idea of the expectations I can have. If it’s already hitting the R3 level, it’s probably going to either flat line or pull back some from there.

14:43
Yes, in some cases it does go beyond it, but but by and large, most of the time it doesn’t exceed the R3 pivot level. And so that’s where the pivots can come in handy. But I don’t necessarily place my stop losses based off them. Like I’m not putting below like a S2 or an S3 level because those will change each and every day.

14:59
Some it’ll be on some cases lower than the previous day or higher the next day. And I don’t want to be, you know, expanding and contracting my stop loss based off a pivot. So I don’t use those. I will use often times hard breaks below a certain moving average where it has a history of dealing with that moving average.

15:16
So if I see where it consistently bounces off of like the 10 day moving average, well, if it breaks below that, then I know that there’s something wrong there. Something’s fundamentally changing or probably the right word is technically changing on that stock. So the risk management takes 2 forms too.

15:36
Like you can say, let’s do the risk, let’s let’s just raise the stop loss. And so you know, you get all in and you get all out. But I’ve, like I’ve said already, I believe in taking partial profits. And when I take partial profits, that’s also a form of managing the risk. So when you’re taking a 1/3 of your position off the table, you’re actually drastically reducing risk because you’re already locking in those profits.

15:59
In fact, it’s more definitive and more definite than raising a stop loss because you’re actually taking money off of the trade. So that becomes more definite. Now, I, I think the best combination is when you can raise the stop loss and take profits simultaneously because you’re, you’re dramatically reducing the risk at that point because you’re raising the stop loss, you’re taking profits off the table.

16:22
And that’s a really ideal situation being but I don’t think that you Willy nilly the stop losses and say, Hey, I’m just going to raise it, you know, 5% below where it’s currently trading at because it can move back down, stop you out inadvertently where it didn’t actually cross any key support levels and go right back up.

16:37
So I always try to place my stop losses below key support levels, whether it’s price level support or trend line support or some kind of moving average. That’s really what I like to base it on. And then when I let the stocks really just run wild, that’s where I’ll usually have my widest stop loss because I’ve gotten to a point where I’m on the final third and more than likely I’m gonna walk away with a decent profit on the trade regardless of what the last third does.

17:02
Unless it just completely collapses on me, of course. But I want to give that the most time to really expand on that reward multiple. So that’s where I want to really start seeing that 3456 to one start to pile on because it makes a huge difference not only on the trade, but also in your portfolio as well.

17:21
So we’ve talked a lot about the the different ways of how I manage the risk, how I determine how quickly I get into my trades. And it all comes down to risk management, managing the trades, planning the trade before you ever get into it.

17:36
Because like I’ve said all throughout these 500 plus episodes that I’ve done now the three things about trading that are the most important one, plan your trade, manage the risk and the prophets will take care of themselves. If you enjoyed this podcast, and I hope that you did, please make sure that you leave me a five star review on whatever platform that you’re listening to me on.

17:55
If you’re watching me on YouTube, make sure to like and subscribe to my channel that helps me out greatly. Check out the self-made trader. I think you’ll really like it. And most importantly, remember that Jesus Christ is the way, the truth and the life. No one comes to the Father except through him. Thank you and God bless.

18:13
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.

18:30
So go ahead, sign up by going to shareplanner.com/trading Block. That’s www.shareplanner.com/trading-block and follow me on Shareplanners, 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.

18:51
All the best to you and I look forward to trading with you soon.