Using Stop Losses To Make More Profits | Podcast Episode #14

0:07
Learn to trade stocks successfully. Learn to profit consistently. I’m Ryan Mallory, and on my weekly podcast, I’m going to teach you the ins and outs of a complex, ever-changing stock market. You will learn to trade better, trade smarter, and profit bigger.

0:26
Now, let’s go trade. Hey everybody, this is Ryan Mallory doing another podcast episode with you today. And the subject that I’m going to tackle is going to be about using stop loss orders and increasing your profits as a result.

0:42
So, How do you stop loss orders? Well, the first thing is, is you always use a stop loss order on your trades. If there’s ever been one aspect that I have beaten into the hearts of traders who have graced my website over the years, and that I have had the pleasure of, you know, working with, mentoring, coaching, it is to put it in their minds that you have to use a stop loss order on every single trade that they take.

1:10
They will keep you in the trading game. They will keep your losses and your losing trades within reason, assuming you aren’t trading penny stocks, in which a stock loss order won’t do you anything. And it’s going to help you to consistently profit at a high rate.

1:27
When it comes to trading tools, stop loss orders are probably the most important trading aspect of making sure you do not blow out your account. You are using this order type to make sure that if the market decides to sell off and take all of your positions down with it, that you aren’t holding on until it feels emotionally acceptable to sell.

1:49
Instead, you have already drawn the line in the sand so that you know where to get out at, instead of relying on your emotions to determine that. By using stop loss orders, you are also making a very important aspect of trading, a very mechanical one and leaving your whims of emotions that face traders daily from getting out of hand.

2:10
So you stop loss orders, know before you even get into a trade where you are going to put that stop loss, and never ever lower the stop loss, ever on any trade. If you widen your stop loss once you are in the trade, you are making an emotional decision out of fear that the market will take you out of your trade and then rally higher.

2:35
That is a horrible excuse. When stops get hit. There are only 2 directions that a stock can take thereafter, up or down. So yes, there will be a large number of stocks that will break out higher after you get out.

2:51
That is just part of trading. When it comes to using stop loss orders, you must apply these 4 important tips. The first one, use hard stop loss orders. It is the belief of many traders that somehow they will always be in control, that they can also react fast enough or be around when necessary to take the right actions.

3:14
That is simply wrong on all accounts. The first step to trading is recognizing that you are not in control, that the market does what it wants to do, and that you have no opinion in the matter. You can only react to what price does to the positions that you are in, whether it is laziness, fear, or overconfidence.

3:32
Many traders like to use mental stop losses. Please, please, don’t do that. Mental stops are bad news. They will eventually kill your portfolio and cause you to take bigger losses than what you would ever have expected to take.

3:49
They will also kill your profit loss ratio. Let’s say for the sake of conversation that you buy a stock at $100 and instead of using a hard stop loss order, you use a mental stop loss of $95. That mental stop loss is hit. You put your order in to sell, but by the time your order to sell the stock is placed, you have seen the stock drop down to $94.80.

4:11
Only 20 cents, you say. Well, do that consistently and you’re going to find yourself losing a lot of capital, capital. Simply because you decided to use a mental stop loss instead of a hard stop loss that will get you out of the position as soon as the stop loss price level is triggered.

4:28
But even more dangerous than that scenario that I’ve just laid out for you is the fact that most traders who use mental stop loss orders do not have the discipline to get out of the trade immediately when the stop loss is hit. In fact, I would say the very fact that one uses a mental stop loss order is usually due to either a lack of discipline or a lack of faith in one’s own trading methodology.

4:49
You see, when the stop loss is hit at $95 the initial response by the trader is to see whether it just touches the stop loss and then bounces higher because as you all know, we hate having our stop loss be the low tick of the stock in a given trading session only to watch the stock spend the rest of the day recovering.

5:06
So as a result, we don’t take the loss, and that very approach by its own definition means that you are willing to take a bigger loss just to make sure that your original stop loss wasn’t the low tick. Second point Stop loss orders work best in tight situations.

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You don’t have to trade with stop loss orders that are 10% away from your entry price. First, your risk-reward ratio is going to be very much skewed to the risk side. But more importantly, trading with tight stops will actually improve the risk-reward profile of the trading strategy that you employ.

5:43
When I trade in the splash zone and when I am stopped out, it is usually no more than about 2 to 3%, with most of the time it being somewhere in the 1% range. That means I can make at least a 2 to 1 profit on the risk when I profit between 4 to 6%.

6:01
To duplicate that on a 10% stop loss order means you need to trade about a 20% profit just to come away with the same stop-loss ratio. Remember, the profits are in the risk reward. If you aren’t profiting much to cover the risk, then you simply are not profiting in your trading strategy.

6:20
Keep risk tight and it makes profiting so much easier. But if you keep the risk large and the stop loss orders wide, then you will find profiting in the stock market a very difficult proposition. Now you might say to yourself, but if you keep the stop loss tight, it makes it more likely I will lose on the trade.

6:38
Who cares if you lose on the trade? That is part of trading. Get over it. If you stay in the game long enough, you will be stopped out regularly. It comes with being a disciplined trader. Tight stops don’t mean that you will lose more either.

7:01
That simply is not true. You see, tighter stops make you look for better charts to trade and requires you to make better entries. That makes for a better trade all around. It keeps you from chasing stocks after their move is already well in progress and makes you get into the beginning of the move instead of at the end of one.

7:21
So with wider stop loss orders, you are more inclined to justify chasing price action because you have plenty of wiggle room with the stop loss that’s so wide, it makes you less picky about where you get in at because your stop loss gives you a higher, higher tolerance for price fluctuation.

7:37
So keep those stop loss orders tight and you’ll profit more and more frequently. Number 3, use stop loss orders to trail profitable trades and. Ensure that you keep the majority of your profits. Now, I am not talking about using a trailing stop loss order, far from it.

7:54
I am simply saying that you should, as a position becomes more profitable, increase the stop loss on it so that you can make sure that you walk away with a sound profit. I am always looking for where I can, within reason, tighten my stop loss on a trade in order to reduce the risk or to make sure I walk away with at least some of the profit on a trade.

8:15
But you have to be strategic about where you put the stop loss at. You simply can’t go out there and arbitrarily place a 2% stop loss on your trade because as the stock moves and becomes more profitable, that stop loss will eventually drift into areas of the chart that do not represent breaks of key support or breaks of a key moving average or a trend line.

8:35
Essentially, that stop loss will be lingering in no man’s land. Instead. When I say you need to trail your profitable trades with a stop loss order, that means you regularly adjust the stop loss of the trade yourself, and as the stock becomes more profitable, raise the stop loss to a key price level that if touched, you will have a high level of confidence that the trade is deteriorating and going against you now.

8:59
But it needs to be wide enough so that you can give the stock some room for normal fluctuations, but still capture the majority of the gains on the trade. Yes, this takes much more analysis and much more work than simply placing a trailing stop on a trade, but in the end, you want to be more profitable and that is the way you want to do that.

9:20
Number 4, you stop loss orders to protect yourself from yourself. There is an important reason why we use stop loss orders, and the final reason is not based on the technicals of a stock. Instead, it is based on the psychology behind the trade.

9:38
You see, stop loss orders protects you from yourself. That’s right, you, me, and everyone else has a full potential and capability of blowing up their account if proper risk management is not maintained and practiced on a regular basis. If you don’t take managing risk more serious than profiting in the stock market.

9:56
You are setting yourself up for failure. The best way to keep losses small is to use a stop loss. When you don’t have a stop loss in place, how do you know where to get out? How do you know when enough is enough? It is an emotional decision at that point because you have to make the decision of whether to take the loss now at the expense of the stock possibly turning around or staying in the trade with the hope of eventually profiting, but at the risk of even losing more, if not everything.

10:24
At that point, you have to make a decision, and the very fact that you are in that situation of having to decide means that you let the stock lose enough capital that your emotions are dictating what you decide and whether to buy, sell, or buy some more, or simply just stay in the trade.

10:42
When you have reached that point, you have already lost in the trade, plain and simple. That is what you are preventing from happening, but that only works for you if you decide before you ever get into the trade, where you will place your stop loss order at. That is how you protect yourself from yourself.

11:01
So let’s keep it real with these stop loss orders. Using a stop loss order with every trade you make won’t completely eliminate disappointment when it comes to trading. There are plenty of things out there that you can do to hurt yourself when it comes to trading, but using stop loss orders is about 75% of the game when it comes to risk management.

11:19
Fail to use them and you will most certainly regret it. I’d also encourage you to sign up for the SharePlanner Trading Block. Don’t worry, there’s no commitment upfront. You get to see me in action for the 1st 7 days of your subscription, and with it, you will see exactly what it means to manage risk, place those stops, and consistently profit along the way.

11:36
I have been doing this for a long time, and I make my trades well-known because I consistently manage risk with each trade, and every time I make a trade, I put myself in a position to profit on a month to month basis while maintaining a very high win rate. I think this year alone, I’m about 59%.

11:53
So in doing so, I eliminate unnecessary losses and make sure those profitable trades remain profitable because Who doesn’t like a profitable trade? So sign up for your free subscription to the SharePlanner Trading Block. If you don’t like what you see, cancel at any time before the 7 days are up, but this is the place that you want to be if you’re going to be serious about trading and making serious income from the stock market and of course, managing the risk.

12:19
Thanks for listening to this week’s podcast of Swing Trading the Stock Market with Ryan Mallory. I’d like to encourage you to join me in the SharePlanner Trading Block where I navigate the financial markets every day with traders from around the world. With your membership, you’ll get a 7-day trial, access to my trading room, and text and email alerts.

12:38
So go ahead and sign up by going to www.shareplanner.com/trading-block. That’s www.shareplanner.com/trading-block. And follow me at SharePlanner on Twitter and on SharePlanner’s Facebook page where I provide unique market and trading ideas every day.

12:57
If you have any questions, please feel free to email me, ryan@shareplanner.com.