The Anatomy Of A Good Trade Setup (Part 2) | Podcast Episode #82

0:00
All right, everybody, part two of The Anatomy of a good trade setup. You’re listening to Swing Trading the Stock Market. Glad you are. Listening to me for yet another week, another episode that makes me feel special because, uh, makes me realize that, hey, I, I must be providing you with some good content at least, right?

0:22
And if that’s the case, I really recommend you go into the iTunes store or whatever platform that you listen to me on and, and give me a good, give me a good rating. Give me a 5 star dadgumit. I think I’m I think I deserve that, right? I mean, suckers do take a lot of time to put together and, um, edit and, and everything else.

0:38
I don’t have like a team of people where I, I just do the recording and I ship it off and I say, hey, fix this and put it all up there. Now, I’m actually, I actually do it all myself, so, uh, Even the graphics, even the graphics that you see that come through with the episodes, I do the graphics too, so.

0:55
Yeah, give me, give me a good score. I, I’d really appreciate it. It, it helps create more exposure for the podcast episode and, uh, more opportunities for it as well. So last week we talked about the first part of this two-part series, The Anatomy of a good trade setup, and I’ve, I, I’ve actually been thinking about doing this two-part series and then maybe even digging in at a, at a later time point and making 8 separate episodes of all these points that I’m going through because Obviously, you do 44 points and you do it in one episode and you’re trying to keep it to 15 minutes. You’re not taking a lot of time to go through them in, in meticulous detail, but if you had a whole episode, you could definitely get down more into the nitty gritty, right?

1:27
So, maybe, maybe I’ll do that at some point here. I’m not sure. Um. I almost thought about postponing this one until the following week, but I wanted to keep to my word because I wanted to talk more about the markets going on and how high can this market go and what, and what is that elevator down event that happens in the stock market, and is this market getting too easy, but we’ll save that for probably for next week. Hopefully the market doesn’t completely crash and make already and make it completely irrelevant, but we’ll see.

1:55
All right, so, part two. But before we do that, we have to get into part one and just rehash what it was that we already talked about.

2:15
The first one was, you have to be willing to plan ahead. Number 2, Expect to be wrong on your trade. Number 3. Number 3 is, why do you want to get into the trade? What is your edge? Number 4, make sure there’s no obvious pitfalls. We talked those in pretty significant detail.

2:31
So if you want to go back and listen to part one, which I actually encourage you to do, definitely do that now. But assuming that you’ve already listened to the first part, let’s jump into point number 5. How will you manage the risk? Now, if you’ve been following me for any length of time, you know that I’m a big promoter of using stop losses.

2:49
Stop losses should be used on every trade. You shouldn’t be using mental stops. They should be hard stops because mental stops tend to create a slippery slope where you’re like, OK, I know my mental stop just got hit, but let’s see if it’ll bounce back. Let’s just see if it bounces back real quick. And if it does, then good. I won’t have been stopped out, but if it doesn’t, then I’ll go ahead and get out.

3:04
Well, If it doesn’t, what does that mean? If it doesn’t, where do you get out at if it doesn’t, if it doesn’t work for you? Does that mean you wait to see another 1% drop or 2% drop before you get out? And then when you get that 2% drop, or you’re gonna be like, oh, I should have gone out when it originally hit. I’m just gonna wait for it to go back up there, then I’ll get out and maybe it doesn’t. Maybe it doesn’t do it at all. And so then all of a sudden you’re down 34, 5% and you’re thinking maybe I’ll just double down and, and split the difference and get back, uh, get back some of these losses. See, see how it bad it can get. That’s none of that is good.

3:38
That is not how you manage the risk. You gotta have heart stops. I don’t see any way around it. I was listening to a guy today on Instagram. He was doing it like, and he was talking about, I don’t use, I don’t use hard stops. I don’t believe in using hard stops. You shouldn’t use hard stops. Man, you crazy? You gotta use stops. He’s like, and he’s like bragging about this. He says, yeah, I get down 10%, but I just waited out. And he’s, he’s advising other people how to trade. He’s telling people what they should be buying and selling and then tells them not to use stops, dude. And and what was even crazier is he was taking like an 18% hit today on Viacom, and you could tell he was kind of bummed out about it, I would be too.

4:16
But he held through earnings and like that can’t happen, dude. Earnings is like the best pitfall in the world for you to take an 18, 20% loss, and then he’s telling people, well, don’t use it, it’ll come back, you know, I, I weathered through, uh, Comcast when it had its sell-off and everything else. That’s because we’ve been in one of the greatest expansionary periods of, of prosperity that this world has ever seen or that this country has ever seen, at least, you know, I know other countries have had their recessions in the meantime, but At least in the United States, the by the dip has been a, a, a fail-safe trading system.

4:49
But at some point, that’s not gonna be the case. And if you’re, what if it’s tomorrow and then, then your Viacom trade just goes to crap. That can happen, man. It could sell off another 30, 40%, 50% and you’re stuck there holding, holding the bag. You got SPC right now and yeah, I made 76% on that earlier this week selling off the last portion of my trade. The first two was 5% and the other was 11%, 11.5%. The last portion was 76%. So it was a great trade. But man, there’s people buy. I got out at $3341. There’s people buying this stuff at $40 a share. I can’t tell you, a lot of these people are gonna be instant back orders because they don’t know how to manage the risk on that kind of a trade.

5:31
I’ll be honest, a stock that’s gone from like 16 to $17 up to $41 I don’t know if there really is a way to manage the risk when you’re buying in at $40 a share. You may get lucky and it may go up to 50 and you’ll feel like a genius. Congrats, but guess what, you took on some stupid risk. I stayed in it till 33. Man, that sucker went all the way up to 39 before I got out at 33, 41. I was playing with a wide bandwidth, but at that point, I was already 76% up on the stock. I had a lot of room to, to wiggle. I had already taken profits. I was working with a smaller position. But you gotta know how you’re gonna manage the risk in some trades you can’t manage the risk, like, like, for instance, if you’re going to go short SPCE right now, right?

6:13
Yeah, this thing’s probably gonna drop just like I just mentioned like seconds ago. But there’s nothing to say that that thing won’t gap up 40% tomorrow. How are you gonna manage the risk on that? You can’t. You’re just gonna get destroyed. I don’t think anybody wants to take a 40% loss overnight. So you have to ask yourself, point number 5, how are you gonna manage the risk? So after you figure out what’s the risk that’s involved, number 6 is where will you get in at? Entry is important and entry is hard. I tell you what, if, if there’s one thing that, that can frustrate the heck out of me is, is, is a bad entry.

6:49
And, and we’re all, we’re all prone to it, but you have to map it out. You have to ask yourself ahead of time, where do I think the, the right places to get long on it. And, and when you do it right, a lot of, it won’t keep you out of all bad trades, but it will keep you out of a number of bad trades. I’ve, uh, if I just buy it right at the market price just because I want to be in the stock. You’re setting yourself up to be in a bad trade, but oftentimes when you say, OK, this is where it’s an optimal place to get in at. Maybe it’s a breakout, maybe it’s a pullback to a rising trend line. That’s what you really want to go after there.

7:08
Sometimes I’m getting in at a stock and it seems like I’m getting in right away as soon as I send out a trade alert. Well, I’ve been watching it for a long time and then I, I’m starting to see where it’s breaking out, and I’m ready to get in at it at that point because it is breaking out. So that’s different besides, I just want to get into it, you know, and, and you don’t, you don’t want to do that. So where do you get in at, and where do you think that it will go? This is part of number 6 too. Where do you think it will go? Is there, is there a clear path to higher profits? If there’s a lot of resistance levels overhead, if you’re buying it at $100 and there’s resistance at 102 103 104 $105 or something. And it, it’s probably gonna struggle to go anywhere real fast.

8:00
So you, you may want to just go ahead and pass on that tray, but if it’s got this huge gap that it hasn’t been filled and it’s breaking out into the gap, that you got an idea that it might want to fill that gap and it’ll, it has a good chance of going higher, especially if the market’s trending higher. But just as a general rule of thumb, at least like 2 for 1, what you think you’re gonna be risking on the trade versus what you think you can get out of the trade. So, 2 for 1, meaning like if you’re buying at $100 a share. And you’re using a stop loss of $95. There needs to be a clear path to at least $110. You know, if it’s a if it’s a stop loss of 90%, then there needs to be a clear path to 120, because then that’s that that that’s why you don’t want to use stop losses of like 20 and 30%, because like, let’s say you think that, OK, I’m gonna get in at $100 and I’m gonna put my stop loss at $80 Well then you need that stock to go to like 140 or if you put it at 70, you need it to go to 160. talking about major moves, yeah, it works with SPC but it doesn’t work with most trades.

8:58
Number 7, capital allocation. How are you going to allocate your capital on the trade? So this is another thing that I think is pretty important. I’ll. I’ll see people that, oh, I got a good feeling about the stock. I’m gonna put 20% of my money down on it, you know, and then they say, I don’t like that stock too much, but I’ll get into it just in case there’s something more to it. I’ll put 5% of my capital to it. That kind of, there’s gotta be a reason for that, you know, like, if you think that it’s a higher risk trade and therefore higher risk trades get a smaller allocation than lower risk trades, like, basically like taking on like. SPCE versus HD.

9:33
OK, that’s good. There’s a system, there’s a method to that. For me personally, I like to have the same amount of capital in every one of my trades. I spread it, I spread it out for the most part, you know, I can have 20 trades in my portfolio at once, you know, and sometimes it can be even more considering how many like partial profits have been taken on some of my existing trades. So like, let’s say for instance, like if I have. 20 positions and I’ve taken half profits on all of them. Well, then it’s really only like I’ve had, I’ve got 10 positions in my portfolio, so maybe I can go a little bit higher and add more positions to the portfolio at that point. But starting off, I like to go, you know, full positions in all my trades.

10:08
I’m not saying that that’s the right way to go for it with, with your trading or that that’s the way it has to be. I’ve been a little bit more dogmatic about that in the past and I’ve, I’ve warmed up to the idea that, OK, you know, maybe for different risk tolerances, like some people may not be comfortable trading at SPCE or a GBTC or, um, I don’t know, some of these other ones, Tesla. It’s got a lot more risk to it, right? So your risk allocation may be smaller to a trade that on a scale of 1 to 5, uh, in terms of uh of risk, risk being 5, a highest, highest risk being 5, and I actually do this in the trading block. I, I score all of my trades setups.

10:47
I I score them on a scale of 1 to 5. You may say, OK, I want to put a lower allocation to a level 5 versus a level 1. I get that, that that’s totally, totally understandable. But doing it based off of instinct or gut, it’s like, oh, I, I really have some hopes that I can score big, and that’s usually why people get disproportionate on their trades. They’re like. I’m gonna make a lot of money and usually it’s, they’re doing that with the highest, uh, risk rating stocks out there. They’ll do like, I’m gonna put 40% on on Tesla at $1000 or 969, wherever it it peaked out last time. Um, I’m gonna, I’m gonna go 40% of my capital on it and then they’re down 20%. They had this gut feeling that, you know, they could score it big, or they’ll do it with like Vick like TVX or TV, TVIX and UVXY. Those, by the way, don’t ever trade those. For Pete’s sakes, if you do one thing in trading, if you don’t ever trade the volatility products, man, there, that is a graveyard.

11:50
Of capital that has been poured into those things. Just don’t do it. I can’t hammer it enough how important it is not to trade those volatility, uh, ETFs. They are so bad. Things like TIX and UVXY, they’re leveraged. Oh my gosh, guys, stay away from those things permanently. I wouldn’t, I don’t even pull it up unless I’m just doing it just for kicks and giggles to show you how many uh reverse splits they’ve had to do over the years, just so that it’s not trading at micro pennies.

12:26
Micro penny is even a thing? I don’t know, but you get what I’m talking about, right? Capital allocation, I think we’ve covered that enough for, for this podcast. The next one, the last one, duplicating your trades. Duplicating your trades meaning like being good at trade setups that you can do over and over and over again. I’m good at breakouts, I’m good at pullbacks to, to rising trend lines or off of support levels. I have a wheelhouse of trades that I’m pretty good at. And I think that’s the other thing too is like getting good at duplicating the same kind of setups over and over again. Yes, you’re not gonna be profitable in all of them, but you should have a history of being The majority of the time being successful in them in having a track record of, of being able to duplicate winning trades over and over and over again, again, you know, you’re gonna have losing trades, but on the whole to be able to show that that you manage the risk that you that you.

13:18
Manage the profits that you manage. The entire trade from from cradle to grave, taking profits along the way, being good at specific trade setups, whether it’s a bounce play, whether it’s breakouts, anything. But you’re good at what you’re doing.

13:37
And that’s gonna be it for this podcast. Again, I, I’m, I’m, I’m weighing the ideas and you can give me some feedback in the comment section or just send me an email, but I really do appreciate your emails too. Um, let me know what you think, you know, do, do, do you want a full series on all 8 parts of what we just talked about?

13:56
And I’ll go ahead and review it again. All 8 parts, the anatomy of a good trade setup. And this isn’t the end all be all list, but I think these are 8 very important things that come along with trading. One, You have to be willing to plan ahead. 2, you expect to be wrong on your trade.

14:16
I know that’s counterintuitive, but I always, like I said in the last podcast, I’m always expecting to be wrong. And I just think I’m lucky when I’m right. I don’t know. I guess I’m lucky a lot. 33, why do you want to get into the trade and what’s your edge gonna be on that trade?

14:34
Number 4, make sure there’s no obvious pitfalls. 5, how are you going to manage the risk? Number 6, where are you gonna get in at, and where do you think it’ll go to? Is there a clear path forward on the trade? Is there or is there just tons of resistance and traps along the way?

14:50
Number 7. Capital allocation, that’s pretty important, right? And he, be good at being able to duplicate your trading success, you know, over and over again on trades after trades after trades. That’s it. That’s the anatomy of a good trade setup. If you have any questions, always feel free to hit me up.

15:06
Appreciate you listening to me and God bless you.