Using Profit Multiples | Podcast Episode #480

0:00
Hey everybody, this is Ryan Mallory with shareplanner.com’s Swing Trading the Stock Market. And today’s episode we’re going to talk about using profit multiples in our trading.

0:08
What does that mean exactly? It means that when you’re going into trading, you’re you’re going to try to get 2 to one or three to 1 or 4 to 1, whatever your objective is, is in your trading. That’s what we’re talking about in this episode.

0:18
And it comes from an e-mail today. I told you I was going to get back to some of these emails, and I am.

0:22
This one comes from a guy who wants to be called Bobby Ray and Bobby Ray. And for those who don’t know why everything sounds like a Florida name, the reason for that is because people don’t want to use their real identities often times. So in order to get them to open up and to ask questions, I had never used people’s real identities.

0:39
I just give them their a good old Florida red nickname. And that’s what I’m doing here.

0:42
So Bobby Ray writes, I recently started listening to your podcast that I can’t get enough. I have been investing for over 25 years, but recently in the last two years that is swing trading to my arsenal and I use it in one of my accounts. I have had good results last year after a mixed year in 2023.

0:58
First of all, I have to say I can’t get enough of your podcast. I think I have gone through 100 episodes already and listen every time I am in the car.

1:05
What I love most about your podcast is the consistency and simplicity of your message and the coverage of psychological and emotional aspects of being a traitor in how your mind many times works against you.

1:16
I learned something new on most of your episodes and even when I don’t, your reinforcement keeps me grounded and reminds me to respect risk.

1:22
You seem to apply the risk reward multiple on on your trades. That is, you expect your expected reward should be at least a multiple of your risk, such as 2 to one or three to 1.

1:38
You seem to tolerate very little risk and as a result, you’re OK with relatively small gains at times.

1:43
I would imagine you are putting on many trades over the course of the year. I usually try to keep my risk or my stop loss anywhere from 2 to 7% maximum.

1:51
Thanks in advance, Bobby Ray.

1:58
OK, so there’s some good concepts here and, and discussion points that I think we can talk about here. 1 I’m definitely not a psychologist, but I do focus on a lot of the psychological issues.

2:06
Now, I’m not a psychologist. How can I really talk about that? Well, I’m talking about from personal experience and, and really all these issues that I talked about in this podcast and this is like #480 on this podcast, all the, all the psychological aspects of trading are things that I’ve had to come to grips with myself.

2:25
They’re, they’re hurdles and they’re, they’re barricades that have prevented me from being able to find success in the past and ones that I had to overcome.

2:35
And so when I talk about having to conquer a psychological aspect in your trading and how important it is for your own training, it’s because I’ve had to go through it myself as a trader too.

2:46
And I think that’s one of the, the, the cool things about this podcast is that I’ve always tried to make it as personal to me because I think that can really help other traders who might be struggling with similar things.

2:57
Or in the future, if they end up struggling with a certain concept or a, a mental aspect of trading, they’ll have one of these episodes that they can come back to and, and be able to hear from a person, a real trader who’s had to deal with it themselves.

3:13
There’s been many times in my trading where I felt like I was a bad trader. I mean, even recently there’s, there’s times where it is easy to let self doubt creep into your trading.

3:22
You get go through a string of trades, you’re like, man, maybe I just suck at this, but that’s going to always be the case. There’s always going to be emotions in your trading.

3:28
We talked about aspects of trading like FOMO and FOMO is a real, real part of trading. And no matter how good you are, there’s always the fear of missing out.

3:44
The difference between a good trader and a bad trader is the good trader who’s who experiences fear of missing out or has that FOMO isn’t necessarily acting on it.

3:54
He’s still staying disciplined. He’s still following his trading plan.

3:58
And I think as traders, until we can come to grips with the fact that we are going to have emotions, we have to recognize those emotions.

4:05
And we have to be able to adapt our trading to the fact that those feelings are going to creep in at times and we can’t, while we can acknowledge them, we can’t act on them.

4:16
So, so much of my trading career has been overcoming these psychological aspects. I’ve never been a person that’s been lacking in knowledge when it comes to the markets.

4:27
I mean, I’ve been doing this for 30 years. I’ve experienced pretty much every sell off over the last 30 years going back to the.com bubble, but I still have to talk myself through emotions at times and through difficult trading circumstances.

4:36
And when we’re in like in a market like we are right now where the VIX is consistently over 30, there’s going to be a lot more emotions that you have to deal with.

4:48
And you have to recognize them ’cause sometimes they come like a thief in the night. They wrap themselves up as like good intentions or something that makes sense to you mentally.

5:02
But in reality, they’re just driven by emotions, driven by FOMO. And so you don’t want that to, to be the case for your trading.

5:08
I promise we’re going to talk about profit multiples, but I like to focus on different aspects of the emails that, that are sent to me.

5:15
One of the focuses of the, of the of recent podcast episodes has been boring trading versus a fun, fun trading.

5:22
And I would expand on that further is that Bobby Ray talks about how I, I keep things simple. And that’s because I do, I, I want it to be simple.

5:31
My concepts are simple. Simple and boring is what I aim for.

5:36
I’m not a genius by any means. I’m not a great mathematician.

5:42
I’m not a scientist. I got a degree in political science and economics, so I wouldn’t necessarily say that that was the most difficult undergrad degree you can get.

5:50
I have an MBA too. I thought the MBA was a joke.

5:54
Honestly. I went to a school down here in Florida.

6:00
It was easy. It was, I would probably say my MBA was easier than my high school getting high school diploma.

6:09
They don’t have to take chemistry in the MBA.

6:09
So but anyways, I, I, I say all that because I thrive off of trading remaining simple, understandable, and boring.

6:18
I don’t want to be running around like Chicken Little trying to make trades. I don’t want to make a lot of trades here.

6:23
Bobby Ray says you probably make a lot of trades. I probably slowed down a lot more as I’ve gotten older.

6:29
I think I made a lot more trades 10 years ago than I do now. That doesn’t mean that I’m making less quality trades.

6:37
It means that I’m learning to recognize better and better. And that’s one of the things we have to do as traders is get better and better at our craft.

6:44
No matter how long you been doing it, you can still improve. It’s just like golf.

6:47
You can always get better until you’re you’re scoring 18 on an 18 hole course. You still have room to improve in your golf.

6:56
And it’s just like that with trading, you can always get better.

7:06
And I think if you were to look at my trading now versus five years ago or even 10 years ago, one of the big differences is the fact that I’ve been able to recognize avoidable losers much better.

7:17
That’s why I talk a lot about that because it’s unnecessary losses that creep into your portfolio that really make the biggest impact on your trading.

7:23
Make sure to check out swingtradingthestockmarket.com. That’s going to take you to my SharePlanner site and it’s going to give you a, a, a list of all the different services that you can subscribe to it.

7:31
That’s something that you want to do if you want to take it beyond just this podcast, get all my stock market research.

7:35
Even better yet, you can get my trade alerts as well. Choose the plan that fits best for you.

7:40
Check that out swingtradingthestockmarket.com.

7:53
Now about profit multiples, one of the things and we’re and still staying on this idea of keeping it simple.

7:59
One of the things that we can do and keeping it simple is taking partial profits.

8:07
Before when there was commissions that were applied to your trade and trade was much more difficult. It’s actually gotten easier because of the Commission free environment.

8:13
When I first started off, it was $20 trade commissions. Let me tell you it you were getting in and you were getting out.

8:20
There wasn’t partial profits at that time because you were doing that, you’d you’d rack up easily $100 on a single trade.

8:27
It could get nuts. You had to be right on your entry spot on and you had to be right on your exit and you had to be spot on about that.

8:35
And then if you started over trading, the penalties went well beyond just being wrong and, and, and emotional about your trades.

8:39
The commissions you could rack up were astounding.

8:46
I mean, there was days where you could rack up $1000 in commissions and, and you do that enough, you’re going to wipe yourself out.

8:59
So the, the, with the environment now with everything being commissionless or for the most part most brokerage is being commissionless, it, it makes sense to take partial profits.

9:07
And so when I take partial profits, I’m taking profits, I’m raising the stop, I’m taking profits, I’m raising the stop.

9:14
And I’m not just raising the stop once. I mean, I may take profits, you know, I take a third off the table and then I raise the stop and then a couple days later I may raise the stop again.

9:22
And then maybe a week down the road, I’m taking another third off the table and I’m down to 1/3.

9:31
And then that’s where I want to let my, and I’m going to raise my stop loss again, but then I’m going to let the winner run wild, OK, That that’s where I want to let that last third go as far as possible.

9:37
Now there’s times where if I’m taking taking a third off at 1:00 to 1:00 and then I’m raising the stop loss, there’s a potential that it goes back to break even and stops me out.

9:43
OK, fine. We move on to the next trade.

9:46
I don’t make a ton off of that, that particular trade.

9:52
There’s the potential that when I go from, you know, once I get into a trade, it goes from 1:00 to 1:00. I’m taking some profits, I’m raising the stop loss, it goes a 2 to one, I’m raising the stop loss.

10:02
And then I want it to go, wow, that’s where I want to try to see can I get a four to one? Can I get a 5 to 1? Can I get a 12:50?

10:04
Because those are the ones that are going to really offset the, the ones where I may only get like 1 to one on the trade or even maybe even just like break even on the trade.

10:14
Because you can go into a trade and say, OK, I want to get one to, I want to get 2 to one on every one of my trades.

10:19
But there’s going to be plenty of trades where you don’t get 2 to one. There has to be a pathway to two to one.

10:23
You don’t want to get into a trade. And that’s where I, I focus on my reward risk ratio before I get into the trade.

10:28
I want to make sure there isn’t like a clear level of resistance that’s blocking a, a stock from being able to progress higher.

10:35
If that’s the case, then there’s really not a 2 to one path.

10:45
If there’s major resistance right at 1:00 to 1:00 or less, so there’s going to be times where the stock doesn’t go as high as I want it to, or there’s going to be market conditions that reverses the market.

10:57
By taking partial profits along the way, I’m able to take on to avoid unnecessary losses.

11:04
So if I was just getting in and getting out 100% in, 100% out, I could be up 5% on a trade and then there’s a downgrade on the stock and now I’m down 5% because the stock reverses 10% on me.

11:15
But if I’ve taken, you know, half off the table prior to it getting, you know, being up 5% on the trade and then it drops five 5%.

11:20
Then the next day I wake up it’s down 5%. Well, instead of taking a 5% loss, I’m getting out at flat.

11:26
And I think that’s the big deal of what I’m trying to focus on here is that not every trade you’re going to get a 2 to one or a three to 1 multiple.

11:36
And, and so those ones that you come out with one to one or you’re either break breaking flat. But if you’ve taken profits along the way, you’re able to avoid and most cases some unnecessary losses.

11:47
And then where you can really offset that and really average out your multiple to a much higher level is when you’re pulling in 4:00 to 1:00 and 5:00 to 1:00. And sometimes you’ll get 12:50 or 15 to 1 on your trades.

11:58
And those are really big game changers. But by not taking partial profits, you do risk going from like being up two to one on a trade to taking a loss.

12:06
That’s why when you are up on the trade and when you, when you’re at the levels that you desire to take profits, that you take those profits even sometimes you’re going to be taking actually, I wouldn’t even say sometimes.

12:16
I would say almost every time you hate having to take partial profits, but more times than not, you’re going to be thrilled that you took partial profits in the end.

12:25
The other concept that I wanted to, to say to you is that a lot of times people think that, that I can’t tolerate risk because I have my risk multiple my, my risk is so tight on the trade.

12:36
Sometimes I’ll take 2 or 3% on a trade and it’s not that I can’t tolerate risk or that I can only accept a little bit of risk.

12:44
I, I do tolerate risk, but I’m not going to tolerate unnecessary risk. So when I’m getting into a trade, I’m wanting to get in where it makes the most sense.

12:53
So if it’s starting to break out, I want to get in early on on that breakout once it starts to expand to where, OK, If originally I wanted to get in with a 3% stop loss, but that stock gaps up like 7% and now all of a sudden I’m looking at a stop loss of like 10%.

13:04
OK, then. Then I’m, I’m a little bit out of my league here because my reward risk ratio has just been greatly skewed against me.

13:14
Now in terms of tolerance for the amount of capital that I trade, I do try to keep my stop loss between 3 and 5%. That’s usually the area that I tried to make all my trades within that range.

13:23
Sometimes it might creep below 3% and that I’m fine with that too, but it has to be justified on the charts.

13:30
So to wrap this up, it becomes very difficult to lose on a trade when you’re taking profits. After you’ve taken that first third of or or half off the table, it becomes much more likely that you’re going to win on trade.

13:47
Doesn’t guarantee it.

13:49
You’re going to have still losing trades at times. It doesn’t happen often.

13:52
It’s usually because of headline risk, but more times than not you’re likely to be profitable on the trade when you’re systematically taking profits along the way.

14:00
Also remember you’re not always going to get 2 to one on every one of your trades. You’re not always going to get 3 to 1.

14:05
Those are targets that you go into the trade with. There has to be a clear path to that, but oftentimes market or sector news or even stock news on the individual stock may keep you from being able to do that.

14:12
You may have earnings in another company that, that kind of blows up your trade and causes you to get out at a much lower price than what you were expecting.

14:20
In those cases, you’re not coming away with that 2 to one or three to 1 multiple.

14:28
Where, where that really starts to happen is when you’re able to sprinkle in those, those runs in individual stocks that might yield you like a 5 to 1 or a 12:50 or a 15 to 1, ones where it just really when you let your winners run wild.

14:39
And that’s why I always try to do that with my final third.

14:44
But when you let that final third run, you can make some impressive gains in your favor.

14:53
So keep all of that in mind when you’re doing your trading and when you’re planning out your trade, make sure that you have a realistic expectation of what your profit multiples are.

15:01
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15:01
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15:10
That does mean the world to me. Those are read by me.

15:13
I do appreciate it and let me know in the comments. What is your view of, of taking profits?

15:20
How do you do it? How do you approach that in your trade?

15:23
Thank you guys and God bless.

15:29
Thanks for listening to my podcast, Swing Trading the Stock Market.

15:29
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15:37
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15:43
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15:55
You have any questions, please feel free to e-mail me at ryan@shareplanner.com.

16:04
All the best to you and I look forward to trading with you soon.