Where To Put Your Stop-Losses | Podcast Episode #490

0:00
Hey everybody, this is Ryan Mallory with shareplanner.com’s Swing Trading the Stock Market. In today’s episode we are going to talk about stop loss placement. Now I’ve done a lot of podcast episodes on stop loss placements. I think it’s one of those topics that a lot of people have questions about and a lot of it comes from just dealing with it first hand, especially starting off you get hit with a stop loss.

0:23
Nobody likes to have their stop loss taken out, but then it’s at times for for new traders, it can feel very personal like the market’s picking on me or that doesn’t seem fair, especially when you see your stop loss get taken out and it goes right back up. So in this podcast episode, we’re going to be talking about stop loss placements.

0:41
How do I place my stop losses? Where do I place my stop losses? And a few other questions as well as I like to do in all my podcast episodes. Anytime somebody emails the show, which is most of the time, I like to give them a good Florida redneck name so that I don’t reveal what their identity is because a lot of times people don’t want their names out there for Internet eternity.

1:02
So in this particular case, I’m going to give the guy the name of Banjo Bob. I’m not sure where I came up with that name. It just I was, I was eating some some cookies and milk and it just came to me Banjo Bob. So that’s what we’re going to do. We’re going to call this person Banjo Bob and Banjo Bob writes.

1:20
Hey Ryan, I got a couple of questions for you. So I got on the platform that has Commission free trading and lets me play stop losses without putting the order in board lots. For those who don’t know what board lots are, that’s essentially like a hundred, a hundred share increments on your orders.

1:37
It’s so much fun lol. Especially because I consider myself a beginner and still trade in small amounts. I am thrilled when I can execute a trade using good technique. I’m more pumped than my plan that my plan worked then the small amount of profit that I actually made.

1:53
Anyways, I was wondering if you could do a review on where and how to place a stop loss as well. When should you use a stop loss versus a trailing stop loss? And how far below the market price do I place those orders? Next question lol I’m not adding the lol banjo Bob’s adding the LOLSII have nothing to do with the LO LS.

2:17
I’m not sure why there’s so many LO LS but there are. Next question lol how do you protect yourself from overnight or over the weekend gap downs lol And what and what is the best time frame chart wise to use for swing trading versus long term or day trading?

2:35
Awesome podcast, God bless banjo Bob. OK, Banjo Bob, lol. Let’s let’s say one thing that you’re doing really good off the bat, and this is what I really like. You’re focused on the process. You’re focused on how you trade and how you’re managing the trade and how you’re getting out of the trade rather than I’m getting in the market with $1000 or $2000, whatever it might be.

2:57
And I’m going to get rich because that is what, 95%, maybe even 99%. I, I would say 99% of the people when they initially get into the stock market and I’m not exempt from that. When I initially started trading, especially during the 90s when everything was going to go up, I really thought I would probably be sitting on $100 billion by the time I graduated high school just because of how fast that market was going up.

3:18
But I obviously I didn’t. So kudos to you for really being enthralled with the process because it’s the process that you got to learn. It’s having a history of making good trading decisions that you have to have a track record of being able to show.

3:35
And you’re doing that. If that is your focus, if your focus is the process and not trying to just get rich right out of the gate, you’re well ahead of the crowd. So kudos to you for that. That’s good. Now where the place to stop loss at? Now this is kind of a loaded question and he also asked me, you know, how to place a stop loss.

3:54
Well, first of all, I won’t get too much into the very, very basics of stop losses, but for those who don’t know, there is essentially like 2 stop loss types that most people use. They’ll use a a stop loss that they place at a fixed amount or they’ll place a trailing stop loss.

4:11
I’m not a big fan of trailing stop losses. And the reason why is let’s say you have a $5 stop loss and you get into stock ABC at $100 a share and stock ABC goes to 101 dollars. Then all of a sudden that stop loss is now at $96.

4:27
And if it goes up to 102 dollars, then it’s all of a sudden at, you know, $97.00. If it goes up to 110, it’s AT105150145. So the the percentage increments is actually shrinking the higher that it goes. So if you start off with a 5% stop loss, that means that, you know, let’s say for whatever reason it goes up to $200 a share, you’re up 100%.

4:51
Now all of a sudden you only have a 2 1/2% stop loss because at $5 stop trailing stop loss, there is 5 bucks. Now some people will do like a percentage stop loss and that’s different. You, you can keep it fairly wide at that point and that’s probably a better way to go about it if you’re going to use trailing stop losses, but I don’t like using trailing stop losses at all.

5:11
Then you have the the manual 1 where you find a place on the chart, you put your stop loss there. Some people use stop limit orders or just stop, stop market orders. I won’t get into the difference of those two because I feel like that’s a whole other podcast in and of itself to try to explain and make sure that you understand what I’m talking about.

5:27
But it’s something, you know, if you go to invest Ipedia or anywhere really, and you can, you can find that out pretty quickly. So that’s the, that’s the two different main types of stop losses. You have, you know, the, the manual 1 where you just put it out there and then you have the, the, the trailing stop loss.

5:46
Now where, where do I put it at on the chart? Where do I determine my placement? Well, that’s going to come from based off of where my entries at. So what I don’t want is to to just identify a place on the chart just to make a great stop loss and not really consider it relative to the entry price.

6:06
Because if $9090.00 a share is really good on this particular stock, it has a strong support level, it’s bounced off of it multiple times. So, you know, putting a stop loss below that level makes sense. Well, I can honestly say that it wouldn’t make much sense from a reward risk standpoint, at least for me if I’m putting my my entry in at $110 a share, because then all of a sudden I’m talking about almost like a 20% stop loss at that point.

6:36
And so it might be a good key support level that you’re putting your stop loss below at $90.00. But if your entry price is at 110, that’s way too far away for most traders, especially if you’re as it’s from a swing trading standpoint, because you’re not setting yourself up for a good reward risk ratio because then all of a sudden you got to get a $40 return.

6:56
You need that thing to go to $150.00 a share just to be able to justify a 2 to one return on that. And if I’m going from 110 to 150, man, that should be like A at least a four or five to one return that I’m getting. So you have to consider your stop loss placement relative to the entry price.

7:15
If you’re not doing that, you’re setting yourself up for some big losses. And So what I look for is I look for the closest support level nearby. What is a logical support level that if broached or breached, I guess breached, breached is the right word. If it’s breached would signify a key break and and that support in the in the trade, it would invalidate the trade setup.

7:38
That’s where I’m looking to place it. So I have to consider again, where is that at relative to the entry price? If it’s not too far away, if it’s beyond my risk profile, then I’m not going to be jumping into that. And that’s one of the main things that I would tell you is that you have to also consider your risk profile.

7:54
Now for me, I like my stop losses somewhere, you know, around that like 4 to 6% range, maybe sometimes even 3%. But what I, what I don’t want is a 15% stop loss. So even if it’s a great trade setup, it has a beautiful chart.

8:09
If I can’t, and I, this happens to be almost on a daily basis. If I, if I can’t get into that, that trade without taking, you know, without a stop loss that’s somewhere in my range, I’m not going to do it. I don’t care how good the chart looks. What matters to me most is the reward risk ratio. So placement is absolutely everything.

8:28
The entry in the stop loss has to be in conjunction with each other. They have to be working together to wide and the risk and reward is not going to be in your favor whatsoever. So again, I used manual ones.

8:43
I don’t use the trailing stop losses. Trailing stop losses are are really bad because you’re not looking at it now. I talked about what they were, but think about trilling stop losses in terms of where it’s getting placed at. If you get in at 100, you have a trilling stop loss of $5 and it goes up to $105 and then it’s now placed at $100.

9:05
Is that a good key support level? I don’t know. It’s just basically picking that out. If it goes up to $105.25, now all of a sudden it’s at 100 and $100.25. Well, that might be just above a key support level. And if the stock comes back down and tests them, bounces out of it, you’re out of the out of the game.

9:24
You, you’re out of that trade and you didn’t have to be out of that trade. And that’s why I don’t like the trailing stop losses. They just don’t consider some key support levels whatsoever for me as well when it comes to time frames, because there was a question asked about what time frames do I use?

9:41
But before I get to that, I want you to go to shareplanner.com. Check out the self-made trader. This is my new flagship course that I’ve just recently come out with. Incredible, incredible course. You’re going to get over 25 hours of lessons just for me to you and you’re going to learn everything that I know that I have been able to accrue over the last 30 years of plus of my trading career.

10:02
I’ve put it all into this training course. It’s really awesome. There’s over 100 modules involved and you’re going to learn everything that I know. So make sure to check that out. The self-made trader. It’s at shareplanner.com. So about the the time frames that I look at on my swing trainings on on my swing trades, I’m more obsessed with the daily than any other time frame.

10:25
I’ll look at the weekly, I’ll look at the 30 minute, I’ll look at the hour, but my main focus is on the daily chart. That is where my stop loss placements 99% of the time come from That’s going to be where I’m going to determine my entry price, where I’m looking at for my target price from swing trading.

10:41
You can get by with just the daily chart and nothing else. Now, I do believe that having if your trades confirm on multiple time frames is good. If it’s confirming on the daily, the hourly and the weekly, that’s a good thing. You want to all want them all to be in conjunction with each other, just like you want to be trading in the direction of the market and you want to be trading in the direction of which sectors that you’re looking to trade and you want to make sure that those are also bullish as well.

11:08
And just the same way you want your time frames to all be bullish. If you’re looking to get long bearish, if you’re looking to get short now from a long term investment, it’s probably more important to look at that weekly chart. Spend a lot more time on the weekly, not just the weekly look at the daily, even look at the monthly. I don’t really care too much about the intraday chart, but if you’re looking at it from a day trading standpoint, that’s pretty much all I do care about is the intraday chart, especially after I get into it because that’s the whole world right there.

11:34
Day trading as you’re getting out before the close of the of the trading session. So really all you need to be caring about once you get into the trade is the intraday charts, whether it’s the five minute or the 30 minute. I probably wouldn’t go too much more than the 30 minute. I think most of the time you want to sit somewhere around that 5 minute chart.

11:50
Some people will use the minute, but I think a lot of times people get emotionally driven when they’re looking at the minute. Candles however, the the five minute tends to be the sweet spot for intraday trading, but I would tell most people they shouldn’t focus on intraday trading.

12:07
Not that there isn’t opportunities that come up from time to time. I take someday trades myself, but focus more on the swing trading. I think the swing trading is is always one of the best areas to start off in.

12:25
How far do I place these stop losses on these swing trades? How far do I place it below? And that’s, that’s really a question that each individual has to answer for themselves. I could tell you, oh, it should be $5 below or 5% below or or 10% below. I can’t tell you that because everybody has a different risk profile and that risk profile is going to largely shape how they react to stock market movement.

12:43
So if you get worked up, if you see a 3% or a 5% move that goes against you on a, on a daily basis, then that’s going to create a lot of emotions. So you probably don’t want your stop losses, you know, around that 5% range. You might want something a little bit tighter.

12:58
Or if you don’t like a stock going against you by 10% and you’re getting emotionally charged by that, then you probably don’t want to have stop losses that go up towards that eight, 910% range. You want to bring it in some, maybe it’s 5%. So it really comes down to who you are as a trader, what is your risk profile and then your stop losses and trying to find trade setups need to identify key support levels that matches your risk tolerance as well.

13:25
OK, so overnight gaps, how do I avoid that as a swing trader? Well, you don’t really avoid that. You have stop loss placements. But if you have a bad news piece that comes out overnight, let’s say the company gets downgraded by Goldman Sachs and the stocks now down 7% overnight before the market even opens and your stop loss was like 3% from the entry.

13:44
Now you have a gap that’s taking place below the entry price. Now what a lot of people do is they think that if they put in their stop losses before that news comes out that they’re entitled to get filled at that. That doesn’t happen that way because in the end, you need a seller, you need a seller that’s willing to or a buyer that’s willing to, to buy what you’re selling.

14:03
And so it’s, it’s like the whole supply demand chart. If you’ve never taken economics one O 1, highly recommend it. Not necessarily going to a college, but just learn about supply demand charts. If you do that, you can understand why stop losses are not going to guarantee that you get out at that price, because if you have a gap down, you’re going to get wherever the highest price that somebody’s willing to buy your shares at.

14:24
That’s it. That’s how it works. A lot of people have that misconception that somehow the brokerages are going to foot that lot. They’ll never foot that loss for you. So in swing trading, that is one of the major risks that if you get into a stock, yes, you could have a gap down. What I do as a trader is that I don’t, I don’t trade stocks that have a history of just gaps out of nowhere.

14:44
One of the stocks that I always like to talk about the most in that regard is Boeing. I can’t stand that chart. I can’t stand the stock. They always have crazy headline events that happened that creates significant gaps lower. Another one is Tesla. I don’t mind it, you know, trading it from investing in it.

15:02
I guess I should say I don’t mind investing in it, but I don’t like the idea of trading it because, and it’s not that I will never do it, but very rarely do I And it that that’s simply because they always, especially right now, there’s so much headline risk, especially with the politicalization of the stock.

15:21
You know, whether that’s fair or not fair, it’s been politicized. And so I don’t want to be getting into a stock that has the potential to gap down 6 or 7% overnight because something that happened in politics. So you have to keep that in mind when when you’re swing trading, it’s it’s helpful to keep a list of stocks that you will never trade because those are the stocks that are outside of earnings can have significant gaps to the downside without any warning.

15:48
If stocks are doing offerings or dilution of their shares, that’s a stock that I would stay away from. For instance, GME, GameStop, I’m never going to trade that one. Then they always are coming out some crazy offerings or dilution of their shares. And then all of a sudden the stock plummets and then all of a sudden you see a whole bunch of people bag holding that.

16:05
That’s something that I don’t want to deal with as a swing trader. So you have to really pay attention to what the charts showing that there’s a lot of overnight gaps. That’s probably 1 worth staying away from.

16:25
If you enjoyed this podcast episode, and I hope you do, make sure to leave me a five star review on whatever platform you’re listening to me on. If it’s on YouTube, make sure to to like and subscribe and check out the self-made trader on shareplanner.com. It’s a awesome training course. I’m telling you, you don’t want to miss out on that thing. The amount of learning and, and experience that you’re going to attain from going through that course, it’s just going to be monumental.

16:42
So check that out. shareplanner.com and send me your emails, guys. I don’t get enough emails from you guys. I think sometimes you guys enjoy the, the podcast, but I do need your, your, your questions and, and your, your thoughts and your struggles as well. I want to hear your story.

16:57
Send them to me. Trust me, there’s, there’s no dumb question. There’s no stupid questions. Send them to me. I’m telling you, I love hearing from you guys. Can do that ryan@shareplanner.com Thank you guys. God bless.

17:15
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17:33
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17:50
All the best to you and I look forward to trading with you soon.