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Ep 163: Vlog on Trading Losses & Hedging Your Trades

Today, what I’d like to do is do a quick little vlog and give you some insights about:

  • Trading losses;
  • When to take profits; and
  • Market euphoria

When you’re looking at overall the stock market, you’re trading. If you’re new to investing and you constantly see a grind higher, and things are always moving in your direction, and you feel good about yourself, it’s usually that exact time when the rug gets ripped out from under you.

The same thing to the upside or the other direction. Anytime you start feeling wrong about your positions, or things seem horrible, it’s when things start to go in your favor.

The market likes to fool most people in the least amount of time. That’s just what it does.

Here are some of the trading screens and things that I watch.

As you take a look here overall, this is the S&P, and it was up much higher about 30 points at the very peak. We’re up still about 21,22 points, but you could see this little bit of a sell-off right here. That’s coming up, but this is just the daily chart. That’s just for today.

Frequently, also what I have here on my screens is a couple of other stocks.

If you look at the VIX here today, you can see how we had that pretty big significant spike right up here. That’s actually at the same time when this market was moving up higher.

To me, when I saw this VIX spiking up to this upside and had me a little bit of a concern. What’s interesting is as we’re selling off, we have a lower VIX.

Anyways, when you’re paying attention to these little divergences and little movements, they can be surprising. You have to take notice, for example, if you look at some of the companies the other day. When we look at Nvidia, how big or nasty of a sell-off, certain moments like this can take out a month’s worth of gains?

If you look at Facebook also boom one big down day now.

The question: are we going to go up a little bit for like three or four days and then down further?

Right now, what’s moving the markets is this tax reform mumbo-jumbo. You have these things like the banks – like the JP Morgan’s. When you look at this JP Morgan, you look at this movement of how far extended we are, and you got these candles like going straight up which is pretty remarkable. I mean I got to give them credit for manipulating the market somewhat. In either case, you know buyers are stepping in, and you really can’t deny that.

My point is that if you’re looking to go into positions and you just new to trading, and you don’t hedge your positions, trading with one or two thousand dollars of five or ten thousand dollars with no hedges. It’s perfectly fine, and it’s okay because you probably don’t have a ton of money on the line relative to maybe a little bit more.

Once you start getting maybe fifty thousand, there are things that you need to do to hedge because what happens is that you get these nasty market pullbacks. When you get an ugly market pullback, then it can wipe out your account quite a bit.

Now the downside with hedging is that when you get market movements like this – when you get these crazy movements to the upside, they can actually stop you out and then within a few moments later they go in your favor because they get so far stretched. And I will tell you that today it took quite a bit of loss because of that movement that we had here.

What is it that you do in these points and situations? How do you know when things are going to work out? When do you decide what to do or take your losses?

The reality is if you’re hedging, what I would much rather do is always take a little bit of a hit every single month on a hedge. You’re taking hits meaning you’re making small losses, but at least you’re protecting your bigger overall picture for the longs. That is only because when those nasty down dates come, it can stop you out and it can create some trouble and problems for you.

If you don’t hedge, you can get yourself in a lot of trouble. So I want you to be careful.

If you do hedge, you’re going to be taking a few losses periodically – time and time again. Just like today, for me on those big up-days be like today you’re going high you’re moving to the upside, and it moves against your hedge positions while you take those losses.

So how do hedges work?

The way that they work and function is that you’re looking to put on some small positions either to the short side or selling call contracts or selling some options or buying options to protect your longs. That way if the market does go against you or against the direction you’re betting on, then what happens is at least you make it back on some of those hedges.

The inverse is true if it goes in your favor, but it moves too far too fast against your hedges. You lose money on those hedges.

When you have a small account, it’s usually not a big deal. When you have a large account, you need to hedge.

What I’m saying is with a small account, most people don’t bother hedging. But as your account grows and as you start trading larger, you’ll probably want to hedge because when you get those nasty pullbacks or nasty movements, they can do some damage.

There’s always going to be some debates that you’ll have internally and mentally: Did I do this right? Should I have waited a little bit longer?

For example on this trade right now, I probably could have said hey I should have waited a little bit longer – an extra 15 minutes, 35 minutes. Probably my positions would have been fine. But in the marketplace, things can go much further either to the upside or the downside then you think or can expect.

So what do you do?

You take your loss. You choose the loss where it’s at where you projected it. When you were in a clear state of mind. Because if you’re doing this and your mental clarity is off-games over, you’re going to take an even more significant loss.

If you do this and you’re not on your game, if you do this you’re trading emotionally, if you do this without a plan, if you get into a trade without setting up your trade or position or at least a rough estimate of a project, you’re going to be in trouble.

So my point here for you in this video is to make a plan. Always have a trading plan for each trade that you take. Whether that’s a rough idea, a guideline, a stop – whatever it is create some plan.

If you’re not hedging yet and you’re trading over $50,000/$70,000, you probably want to start trick a little hedging.

Whether that’s taking on some positions that are opposite to your normal positions, doesn’t mean you’re going to be taking hits on them every single day. But in theory, you may be taking hits on them every month. That’s to protect you for when things go against you.

You may think it’s silly. You may think it’s stupid. But when those days come, you’re going to wish you had those hedges because you’re like oh they saved me.

In either case, I hope you’re having a great trading day even if you’re taking a few losses. It’s always a learning experience. Brush it off. Tomorrow’s another day.

You got this tax thing that’s coming out. It looks like they’ll pass. Anybody making over $400,000 or $500,000 a year from their regular job should be doing quite well, and the corporations will be making more money. That’s a good thing for the corporations. As a person based on what my account said and based on the consultations I had with some financial people, doesn’t look like it’s going to be too for the middle class, or pretty much anybody making under $200,000 a year.

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