Fund Manager & Former Pro Trader Shares How To Minimize Trading Losses
In this episode, former top performing CIO and current Kaiju Global Chair Ryan Pannell talks to Benzinga’s own Aaron Bry about how to effectively plan trades to maximize your chances of positive outcomes.
Ryan shares his trade planning process, discusses the asymmetrical return on risk (what it is, and why it’s your best friend as a trader), how to ensure that you have an adequate asymmetrical return on risk profile, and offers tips on how to increase your asymmetrical return on risk.
Ryan demonstrates how with a properly skewed asymmetrical return on risk, you can actually be wrong most of the time and still make money - and how when your asymmetrical profile is inverted, you can be right almost all the time and still lose money. You don’t want to miss this discussion on what Ray Dalio once said was the most important investing concept of them all!
Ryan shares his trade planning process, discusses the asymmetrical return on risk (what it is, and why it’s your best friend as a trader), how to ensure that you have an adequate asymmetrical return on risk profile, and offers tips on how to increase your asymmetrical return on risk.
Ryan demonstrates how with a properly skewed asymmetrical return on risk, you can actually be wrong most of the time and still make money - and how when your asymmetrical profile is inverted, you can be right almost all the time and still lose money. You don’t want to miss this discussion on what Ray Dalio once said was the most important investing concept of them all!
Transcript
00:00 (upbeat music)
00:02 - Oh man, Ryan, how are we doing today?
00:08 - Good, you say all the nice things
00:10 before these shows start.
00:11 So I love it, I feel like I should tell my mom to watch
00:14 or something like that.
00:15 Look, this guy says nice things about me.
00:17 - Well, it's all true.
00:19 I mean, look, I'm like a guy who just started
00:22 trading stocks during COVID-3.
00:24 Like I have no business even having
00:26 these conversations with you.
00:28 You know, I feel very--
00:29 - Come on, come on, anybody can have these conversations.
00:33 It's not a closed club, right?
00:35 That's what we're doing here.
00:37 I wanna treat it like a bit of open information
00:40 for everybody.
00:41 - And that's really what Benzinga is all about.
00:43 Benzinga is, you know, part of our mission
00:44 is always to try and democratize financial news and data.
00:48 Kind of take things that have been these trade ideas
00:52 and this information that had been kind of reserved
00:54 for like the elite of Wall Street for a long time
00:57 and make sure that everyday people, you know, like myself,
01:00 like the people in the audience have this type
01:03 of information, they can make more informed decisions
01:05 with their trading and with their investments.
01:08 - Yeah, exactly.
01:09 I mean, and there's stuff that's gonna be impossible
01:14 to share in this kind of a forum, right?
01:16 Like, you know, no matter whether you had access
01:19 to a top trade desk or not, someone comes in and says,
01:23 "Hey, give me some tips.
01:24 "I wanna learn how to trade, you know,
01:26 "volatility, arbitrage and options."
01:28 Like, forget it.
01:29 That's never going to happen, not on a retail level,
01:32 not ever.
01:33 You know, like junior traders spend like three years
01:35 before they're placing trades in that type
01:37 of a trading environment.
01:39 But, you know, long, short, equities, basic options,
01:43 yeah, there's a lot of accessible, easy information
01:47 that you should be able to get from professionals.
01:49 They just tend to not share it.
01:51 So that's what we're trying to change.
01:53 As usual, share some information.
01:55 - Little secret.
01:55 - Not gonna kill us, right?
01:56 - Yeah.
01:57 Well, Ryan, I had mentioned it's been now a couple of weeks
02:01 since we've been together.
02:04 Can we just give a quick recap of kind of where we left off,
02:07 what we discussed, I guess, a couple of weeks ago now?
02:10 - Yeah, I think, you know, we ended on a fun one, right?
02:13 We went through some indicators that you might wanna use
02:17 for swing trading and position trading,
02:20 how to set them up, how to read them.
02:23 And we went through a couple of examples of, you know,
02:26 sort of, and I hate to say it's not red light, green light,
02:29 it's not go and stop, but it's conditions that are favorable
02:32 to placing a trade in that environment,
02:35 conditions that are not favorable,
02:37 and how the indicators can help you see that
02:39 a little easier.
02:41 And they're complimentary to the other work
02:42 that you do as a trader.
02:44 So that's always a fun one.
02:46 You know, people are, like we said on the show,
02:49 they're convinced that the indicator's gonna make
02:53 all the difference.
02:54 They'll make a huge difference,
02:55 but they won't instantly make you money.
02:59 It's not, there's no collection of indicators
03:02 that you can just follow the patterns of,
03:05 you know, crosses or whatnot, and be a successful trader.
03:09 They don't work that way,
03:10 but they hopefully can help you see opportunity
03:13 that you wouldn't see otherwise,
03:14 and see risk that you wouldn't see otherwise.
03:17 So that was fun.
03:18 Today, not so much fun,
03:20 'cause this is all risk management,
03:22 which is mostly about saying no.
03:25 But honestly, this is where you make the money.
03:27 Right, the risk management is kinda like,
03:30 it's kinda like dieting, right?
03:31 Like who wants to be told,
03:32 "No, you can't eat that cookie after dinner,"
03:35 or, "No, you have to be disciplined," and--
03:37 Well, I was like, yeah, it's the downside of that,
03:41 you know, health and wellness.
03:42 Like, how do I get six-pack abs?
03:45 Yeah, you gotta go to the gym.
03:47 You gotta not drink.
03:48 You've gotta eat like this.
03:50 And you've gotta do that for a year.
03:51 Nobody wants to hear that.
03:52 Everybody wants to hear the 10-minute abs, right?
03:54 It's like, "All I gotta do is," no.
03:57 You gotta do that, and then all this other stuff.
03:59 Give me the 10-minute abs,
04:01 and a stock that's gonna go up 1,000% overnight,
04:04 that I can just get rich on real quick.
04:06 Exactly. And then we'll be good.
04:07 Nobody wants to do the risk management part.
04:09 But that's, honestly, you'll hear,
04:11 for every professional trader, we'll say the same thing,
04:14 and that's that it's relatively easy to make money.
04:16 The hard part is keeping it.
04:18 And probably most of your viewers
04:21 have experience with that.
04:22 They'll go on, like, hot runs,
04:24 and you're planning out how this is gonna replace your job
04:27 if you're doing it for sort of secondary income,
04:31 and you're projecting this out 10 years,
04:33 and then you get smoked one week or one month,
04:36 and you're back to close to where you started again.
04:39 And that's really down to
04:42 what we're gonna talk about today.
04:44 Well, let's get into it, Ryan.
04:46 Again, today's topic,
04:48 it's all gonna be about risk management,
04:50 how to minimize your losses.
04:52 If you guys have any questions on this topic
04:54 that we don't get to, let us know in the chat,
04:56 and I'm sure we can discuss them.
04:58 Part of being a successful trader
05:04 is having a plan of attack,
05:06 doing things kind of with strategy,
05:08 not just throwing things out there kind of willy-nilly.
05:11 Why to you is having a comprehensive strategy so important?
05:15 Well, if you don't have a plan,
05:18 then let's be clear, you're just gambling, right?
05:21 And I mean, hey, if this is the way
05:24 in which you wanna gamble,
05:25 and you do it responsibly,
05:29 I'd rather you're here than out at the track,
05:31 to be perfectly honest.
05:32 So if that's your thing,
05:34 like you used to bet on sports,
05:37 and now you play the stock market a bit,
05:40 have fun, more power to you, you don't need this.
05:43 But of course, if you're doing that,
05:45 you're accepting potential 100% loss all the time.
05:49 That's not really what we're focused on.
05:50 We're focused on people who are trying to do this
05:52 to add to, add a secondary income,
05:55 to self-manage their investment portfolio,
05:58 to perhaps they're hoping to treat it
06:02 as a primary source of revenue.
06:04 This is gonna be your future.
06:05 You're gonna be staying home,
06:06 you're gonna trade a portfolio.
06:08 And if that's the direction that you're going in,
06:12 then having a plan is essential.
06:13 Like no professional trader
06:16 is like just running random scans,
06:19 seeing some vol buzz output,
06:21 being like, "Oh yeah, that's running today.
06:23 "I think I'll pick up some of that."
06:24 Nobody does that ever, like not ever.
06:27 For one, we have to be able to explain
06:29 every single trade to the regulator.
06:30 So if I literally gamble, and I'm just super lucky,
06:35 I buy this stock, I'm like blindfold,
06:38 I'm bored, I buy 250 grand of this thing.
06:41 And all of a sudden there's some announcement
06:44 that comes out and this thing goes 10X in two days,
06:48 I am going to have the SEC at my doorstep
06:51 asking about that trade.
06:54 And I can say, "Dude, it was totally random.
06:56 "I just literally threw darts at a board and I picked that."
06:59 But as a professional market participant,
07:01 I'm probably gonna be in a lot of trouble.
07:03 So everybody has to be able to explain
07:05 the rationale behind their trade decisions.
07:08 And that should flow through to the retail side.
07:10 If you don't know why you're buying something,
07:13 or shorting something, if you haven't planned this out,
07:16 you should not be doing it.
07:18 That's right there, stop what you're doing.
07:21 Like you should have done some sort of analysis.
07:24 You've got a plan, this is tick the boxes for you
07:26 on some level, and then you've done
07:29 this run gain analysis run, right?
07:31 You've done your return on risk evaluation
07:33 to determine if it doesn't go well.
07:37 What's gonna happen to you?
07:38 What are you prepared to take in terms of a loss?
07:40 If the answer's nothing, or very little,
07:42 or an unrealistic amount, stop what you're doing,
07:45 walk away, you don't actually really wanna make this trade.
07:48 Yeah, and I mean, I think that's where a lot of people
07:53 that are newer can sometimes run into problems
07:56 is maybe they have some initial success early on,
08:00 and then they wanna keep going,
08:01 even if maybe the market's not set up for it that day,
08:03 or they have trades that aren't working out,
08:05 and they're like, "But wait, hold on,
08:06 "I made a grand last week, now I'm down 300,
08:09 "I gotta make 13 more hundred to get back
08:11 "to make another grand this week."
08:12 And then they try to kind of force it.
08:14 And at least in my experience, when I've tried to do that,
08:18 it doesn't really work out that well.
08:19 Some other people might have some other experiences,
08:21 but maybe not.
08:22 Ryan, for you, how does risk mitigation
08:26 fit into a comprehensive strategy?
08:30 After you've identified the opportunity,
08:34 it's the next phase of the opportunity.
08:36 So if you're running any kind of software
08:39 that's allowing you to scan for specific opportunities,
08:41 whatever it is that you trade on,
08:43 you're a momentum trader, you're a position trader,
08:45 you're looking for consolidations within a platform,
08:49 you're looking for, I don't know,
08:50 old school breakout patterns, whatever it is you do,
08:54 your life will be infinitely easier if you use software
08:57 that allows you to scan for this condition, right?
08:59 So you're running these things every day,
09:01 and maybe there are scans you run
09:03 in specific market conditions, you don't run in others,
09:06 and so you're running your scans, right?
09:07 And this is kicking out candidates to you.
09:10 You're scrolling through these candidates,
09:12 spacebar, tab, whatever it is,
09:14 and you're landing on something that ticks all the boxes
09:18 because it's programmed into the scan.
09:20 So now you're gonna do a deeper analysis.
09:22 If you're a fundamentalist,
09:23 you're reading some quarter on quarter.
09:25 If you're a technical trader,
09:27 you're looking for specific confirmation signals
09:30 in the indicators.
09:32 And after you've seen all of that,
09:34 you have to do this risk analysis.
09:37 It's like, okay, where do you need this to go
09:42 relative to where you're going to tap out
09:45 for this to be worth it for you?
09:47 And if you are, everything's green light go,
09:52 but you are at an all time high
09:55 and a run exhaustion pattern,
09:57 and it is a long way down before you tap out,
10:01 are you honestly expecting two to three times that
10:05 on the upside?
10:06 Probably not.
10:07 And if the answer's no, that's unrealistic,
10:10 and I don't think it'll get where I need it to go,
10:13 need to move on to the another opportunity.
10:15 So it's the step that comes right before
10:19 I'm gonna load this into my order ticket entry window,
10:22 right, is your risk assessment.
10:24 - Yeah, and that's, again, like what you're willing to risk,
10:30 I think is one of the most important questions
10:34 you have to ask yourself as you're starting out
10:36 and trading, because if you,
10:37 I always tell people, right,
10:41 to not trade with whatever they can afford, right?
10:43 If you, don't start trading and buying stocks
10:46 with money that you need for rent or something,
10:48 but if you have, okay, here's $500 I have on the side,
10:52 I don't care if I lose all of this,
10:54 then okay, that can help determine how you can invest this
10:57 and how much risk you can take on.
10:59 If you have a pile of money and you say,
11:01 "Okay, I'm willing to lose 20% of this, but not all of it,"
11:05 then that's gonna impact what risk you're willing to take on
11:08 and where you might be able to trade in,
11:10 'cause I think there are a lot of ways
11:11 you can still take some risk on and still make money
11:14 without necessarily putting everything you have at stake
11:17 versus if I go buy a bunch of options that expire tomorrow,
11:21 I'm putting it all at risk.
11:22 And I know if I ever do that,
11:24 which I do do that sometimes is I'll buy some spy calls
11:28 or spy puts that expire tomorrow,
11:29 but I treat it like you said,
11:31 or like you were talking about, like sports gambling.
11:35 I would treat that as something like,
11:37 "Hey, I'm gonna spend $200 on these calls knowing full well
11:41 that not only is it a full possibility
11:43 that I lose that whole 200,
11:45 it's probably more likely gonna happen than not."
11:48 The way those options markets are set up
11:50 is they're not meant to be over 50% hit rates
11:54 on some or at least some of the ones I'm doing,
11:55 but they're meant to be kind of like,
11:57 "Oh, and this, you know, in the minute chance
12:00 that the market goes up 1.5% tomorrow,
12:02 I'm gonna make a lot of money off of this."
12:03 Versus, "Okay, I was okay losing that $150 or 200
12:07 'cause I had my thesis and it didn't play out
12:10 or whatever it was."
12:11 - Yeah, exactly.
12:12 And you know, you have to let the law of large numbers
12:16 work for you.
12:17 Like that's what any professional trader does.
12:20 You know, if you flip a coin 10 times,
12:23 it's totally possible that you'll get 10 heads and one tails.
12:27 But if you flip the same coin 20,000 times,
12:30 you're gonna get almost dead on 50/50
12:34 because that's a coin flip.
12:35 But you have to let the law of large numbers
12:38 play out to do that.
12:39 So if you've got your hypothetical example
12:41 of I've got 500 bucks to trade,
12:43 if you throw that into one trade,
12:46 like you need it to win.
12:47 If you lose, depending on how much you've bet,
12:51 now you got 400 bucks.
12:52 Now you've got 300 bucks, whatever it is.
12:54 I mean, small, small, small size is your key
12:59 and more options, right?
13:01 If your scans, if by the time you are done your analysis,
13:05 you turn up 10 candidates that in your opinion
13:09 are equally valid and equally likely to achieve success,
13:14 your outcomes are gonna be vastly more favorable
13:19 if you can trade all 10 of them.
13:22 If you can only trade five or you only pick five,
13:25 it's possible you've picked the five losers.
13:28 And the other five are total winners.
13:30 So smaller, more, better, for sure.
13:35 - Yeah, so I agree with that 100%.
13:40 Ryan, what is asymmetrical return on risk
13:44 and why is it important to you as an investor and trader?
13:47 - If everybody here takes one thing away
13:50 from anything that I say over like these eight episodes
13:53 that we're doing, like this is the one thing
13:55 that you should take away.
13:57 And that's the power of asymmetrical return on risk.
14:00 This is how professional traders make money.
14:02 If you wanna know how we make money,
14:05 this is how we make money, right?
14:08 It's not some trick, it's not some club,
14:10 it's not inside information.
14:12 It's that we leverage asymmetrical return on risk
14:15 and most retail traders do not leverage
14:19 asymmetrical return on risk.
14:21 So what that means is that we make more money
14:24 when we win than we lose.
14:26 So you want something that's very minimum,
14:29 like you take a buck, right?
14:30 Any trade, you win, you win $2, you lose, you lose $1.
14:35 Preferably it's three to one or higher.
14:38 So when you win, you win $3, you lose, you lose $1.
14:41 Almost all retail traders trade with an inverse
14:45 asymmetrical return on risk profile.
14:47 And in doing research for these segments
14:51 and for what I was gonna share,
14:54 I would lurk around in some retail trade rooms
14:56 just to see how retail traders were talking to each other.
15:00 And the thing that I saw over and over again
15:02 were people posting, right?
15:04 Common rule in a retail chat room is
15:06 you're not allowed to post an exit
15:08 unless you've posted an entry.
15:09 So you have these people posting their entries, right?
15:12 They would say, you know, just bought 100 lot XYZ
15:17 at 10 bucks, looking for 50 cents of upside,
15:21 willing to tolerate a buck 50 of downside,
15:24 don't chase if you can't take the pressure.
15:27 And that like blows my mind.
15:29 It's like right there, you're chasing a dollar on the upside,
15:34 you're willing to lose $3 on the downside.
15:36 So you gotta beat an 80% win rate
15:40 to kind of sort of break even on your trading strategy.
15:43 And that's the thing, right?
15:44 Like everyone focuses retail on win rate, right?
15:48 It's like, how often are you right?
15:50 That doesn't matter at all.
15:53 It's the asymmetrical return on risk.
15:55 Ray Dalio on average, like their Bridgewater
16:00 looks for a five to one asymmetrical return on risk.
16:03 He can be wrong like seven, eight out of 10 times
16:08 and still make money.
16:09 Like just let that sink in for a second, right?
16:12 Instead of having to be right 75% of the time,
16:14 80% of the time, you could be right 30% of the time
16:19 and make money if you have the right
16:20 asymmetrical return on risk.
16:22 So every time you do your analysis,
16:24 you need to get two to $3 of upside per dollar of downside
16:28 that you have at risk.
16:29 That is the difference right there.
16:32 - And I think that's just a super important point
16:35 to bring up 'cause like you said,
16:37 with some of these trades that people are making
16:39 in the chat rooms and whatnot,
16:42 you have to win like an extraordinary percentage
16:46 to be making money, which is just,
16:48 I'm not gonna say impossible,
16:50 but pretty much impossible, right?
16:52 Like no one's winning 80% of their trades,
16:53 even people that are really good at it.
16:56 Like you said, they just have the professionals
16:58 have better risk management
17:00 and are winning more than they're risking
17:04 so that you don't need to have an 80% win rate
17:08 to be positive at the end of the month.
17:10 - Exactly, and you think about a couple of the big icons.
17:13 So Paul Tudor Jones, iconic trader, iconic fund manager,
17:18 he has at the peak of his career,
17:21 he was right six in 10 times,
17:23 which was considered relatively extraordinary.
17:25 Six out of 10 times, that's it.
17:27 Renaissance Technologies, the top performing hedge fund
17:31 on the planet for the last 30 years
17:33 is right a little over 50% of the time.
17:37 Okay, so how is it that they have a 67% return
17:40 net of all fees every single year on average for 30 years?
17:45 Because they have a ridiculous asymmetrical return on risk.
17:49 So when they're right, they win a ton of money
17:51 and when they're wrong, they lose very little.
17:53 So that's the key.
17:54 Like instead of trying to be right all the time
17:56 and then wearing that on your shirt, right?
17:58 Like sitting there and being like,
17:59 "Oh man, I was wrong again."
18:02 Leverage it to your benefit,
18:05 to have a properly skewed asymmetrical return on risk.
18:09 And then you don't have to worry about being right so often
18:12 because when you get paid, you get paid a lot more.
18:14 - Yeah, I mean the Renaissance story,
18:19 if people haven't gone out there
18:20 and learned about that story
18:24 and Jim Simons and everyone over there,
18:27 I mean, it's just incredible.
18:29 I mean, you could learn a lot from just what they do,
18:31 I think.
18:32 I mean, it's just tough I think that people don't grasp,
18:37 it's hard to grasp your head around that, Ryan,
18:40 that just over 50% win rate
18:43 and yet you said the returns were what?
18:45 Over 60% on average?
18:47 - 67% net of all fees after fees.
18:50 And bear in mind,
18:51 Rentec charges a 45% performance fee
18:54 and a four and a half percent management fee.
18:57 Like post '08 collapse,
19:03 they lost like, I don't know, 40% in two weeks
19:06 and then they ended the year 126%.
19:09 Like, yeah, fine.
19:10 So they're an AI shop and the godfathers of AI,
19:14 quant originally and then AI and investment management,
19:17 but still like, what did they do?
19:19 Did they build systems that won all the time?
19:22 No, they built systems that delivered
19:25 high asymmetrical return on risk
19:28 and simply won better than 50/50,
19:30 like barely better than 50/50.
19:33 - Yeah, and again, I mean, like we're,
19:35 you know, as retail traders,
19:36 we're not gonna be able to do everything
19:38 that Renaissance does.
19:39 I'm not saying that 'cause they're obviously doing these,
19:41 you know, crazy quant trades and using AI and all this stuff,
19:44 but can you learn a thing or two from like their overall--
19:46 - It tells you what they focused on, right?
19:48 Like if they focused on,
19:50 if what snuck out of that shop
19:53 wasn't that their win rate is slightly better than 50/50,
19:57 but their win rate was above 80%,
20:01 you would know where to focus your efforts.
20:03 Well, I guess I gotta get more accurate.
20:04 I guess I have to try to pick strategies that,
20:07 you know, where I win more,
20:08 but that's not where they focused.
20:10 So why should you focus in the same areas?
20:13 Why are you gonna beat yourself up
20:15 trying to be six out of 10, seven out of 10,
20:18 eight out of 10, when you can be three out of 10
20:21 or four out of 10 and still make money?
20:24 I mean, you have an inverted asymmetrical return on risk,
20:28 and with the cost of trading plus your time,
20:31 you know, if you're trading one to three,
20:34 you can be right 75 to 80% of the time
20:37 and you will lose money.
20:40 At the end of the year, you'll be looking at it going,
20:42 I don't understand.
20:44 I win most of the time and why am I down?
20:47 Why am I down small?
20:49 Because you trade one to three and not three to one.
20:52 And when that pops up, you know,
20:56 so why are you doing that?
20:57 Because you're not actually comfortable
20:59 with the risk of the trade.
21:01 Like you're doing your analysis,
21:03 you look at the chart and you set your stop loss.
21:07 If you're not using a stop loss, that's insane.
21:09 Every single equity trade should have a stop loss.
21:12 Just as a mechanism to check yourself.
21:15 If you are not willing to put a stop loss on that,
21:18 you're not actually comfortable with the risk.
21:21 If you're comfortable with the risk,
21:23 why do you care about putting a stop loss on?
21:24 You're trading something at 10 bucks
21:26 and you don't wanna put a stop loss at $9
21:29 and you think this thing might make it to 13,
21:32 where would you be comfortable putting the stop loss?
21:34 Eight bucks, 750, okay, so now your return on risk sucks
21:38 and you know that you're not really comfortable
21:40 with the level of risk in that trade,
21:43 you would have to assume,
21:45 like either you're gonna get stopped out too early,
21:47 okay, it needs to go further,
21:49 or you need to pick something else,
21:50 or you're just nervous about quote unquote being wrong.
21:53 Like be wrong, get stopped out, move on.
21:56 Law of large numbers, asymmetrical return on risk.
21:59 - Yeah, I couldn't agree with that more.
22:03 And again, like Ryan said this a few minutes ago,
22:06 if there's one thing you take away from all this,
22:08 this is it.
22:08 So if you wanna go back and listen to this after the show,
22:12 please do because that's,
22:14 you know, this is some very, very good information
22:16 that will take you a long way in your trading journey
22:18 that you're probably not gonna find
22:20 in these retail chat rooms on Discord
22:22 or on Twitter gurus and things like that.
22:25 They're not talking about asymmetrical risk.
22:27 They're, you know, just trying to all,
22:29 I'll get you to do their trades.
22:31 So Ryan, let's talk about actually going ahead
22:34 and setting up a trading strategy.
22:36 You know, where do you start?
22:39 How do you go about it?
22:40 And does your strategy change depending on the market?
22:45 Like if we're in a bull market right now
22:46 versus if, you know, things aren't going well
22:49 or do you just stick to the basics no matter what?
22:52 - Yeah, I think, you know, I mean, setting up a strategy,
22:55 God, there's, you know, that could be millions of episodes
22:58 just on their own, right?
22:59 I mean, it depends what the trader themselves
23:01 are comfortable with.
23:03 So most retail traders have a trading strategy.
23:05 You trade precious metals, you trade futures,
23:08 you trade tech and that's it.
23:12 And you're a momentum trader, you're a position trader.
23:15 You try to take the top weighted or highest performance
23:20 S&P or Q's components, whatever your strategy is, right?
23:25 So you already have this.
23:27 You're, what you're talking about with risk management
23:29 is managing the trades that you've decided to make.
23:33 So step one, are you sure you wanna make the trade?
23:36 Like you have some sense of what you're hoping to achieve
23:41 versus what you're hoping doesn't happen
23:45 and if it happens, you're going to take the loss
23:47 and move on.
23:48 No one should ever just let something crater, right?
23:51 It just goes on and on and on.
23:53 You're bleeding to death and you're sitting there going,
23:55 it'll turn around, please, I hope this will turn around.
23:58 Like don't trade if that's your outlook.
24:01 You need to be fairly emotionless about these things.
24:03 So when you go in, you know, we use our $10 stock, right?
24:06 You've decided, you're a momentum trader.
24:08 This thing has had whatever you consider a breakout.
24:11 It's some pattern you learned,
24:12 it's ticked some boxes on your indicators.
24:14 Okay, so now you think it's gonna go higher.
24:17 So one, how high do you think this is gonna go?
24:21 Like, is this gonna move all the way up?
24:23 Is this gonna, you're looking at your chart here, right?
24:26 So you have like breakout patterns coming out of this chart
24:29 that you're looking at and you know,
24:32 are you heading up towards a previous high?
24:35 Earlier this year, you've established like an all-time high.
24:39 So you have some reasonable expectation on a breakout
24:42 that your previous high is possible.
24:45 It's been there before.
24:46 If it's never been there before, then what do you do?
24:50 You take the average of the last six or seven breakouts
24:54 and you determine how far that's gonna run.
24:57 Then like, where's your support level?
24:59 Support and resistance are a whole other conversation.
25:02 And there are multiple ways to calculate that,
25:04 but you probably have some sense of like, okay,
25:07 if it goes here, I totally didn't expect that and I'm wrong.
25:11 So it's just a simple calculation.
25:12 Realistically, and I always start with the negative, right?
25:16 Like this is where I'm gonna stop out down here.
25:20 So I set that and then realistically,
25:23 do I think there's potential for three times that?
25:26 If the answer's no, I don't trade it.
25:29 You know, if it's fast moving, if I'm close to close,
25:33 I might take two to one,
25:35 but that is absolutely the bare minimum ever.
25:38 Three to one is the average, four to one is ideal,
25:41 five to one, honestly, I don't know how Dalio does it.
25:43 Like that's just lucky, right?
25:45 It just kept running and you're like,
25:46 ooh, I got five to one.
25:47 You could do it by adding options as well.
25:50 And we'll talk about that in a little bit.
25:52 So that's your first step with your strategy.
25:55 Determine whether or not the run that you need to get
26:00 relative to the risk you're comfortable with
26:04 is likely to occur.
26:06 The answer's no, don't trade it.
26:07 - That's very interesting.
26:10 I've never really thought about it that way, honestly.
26:13 Are there key elements,
26:16 are there any other key elements of a strategy
26:18 that every single trader needs to think about?
26:20 I mean, you mentioned stop losses that every trader--
26:23 - Stop loss, stop loss, stop loss.
26:24 Like it doesn't matter whether you are trading intraday.
26:29 I hope you're not.
26:30 But if you are, or if you're at least managing a trade
26:35 intraday because it's run
26:37 and now you're using like a trailing stop,
26:39 you should always use a stop loss
26:42 because it forces you to draw a line in the sand
26:45 and you never touch it.
26:47 So that's the other thing that a lot of retail traders
26:50 will do is that, you know, the stock collapses,
26:53 it gets close to the stop loss, it's teasing it,
26:56 it's almost there, it's almost there,
26:59 it doesn't quite touch it.
27:01 And you're like, come on, come on, come on.
27:02 It has a couple of surges up, it goes back,
27:05 it gets really close, and then it crosses the stop loss
27:09 or threatens to, and the trader will grab the stop loss
27:12 and pull it down to give it a little more breathing room.
27:16 Like, oh, I've set it in the wrong place.
27:18 If I just let it go a little further, it'll recover.
27:21 No, it means that you didn't fully accept the loss
27:26 when you put the trade on.
27:28 You're violating the contract with yourself,
27:30 which is I'm out right here.
27:31 At this point, I'm wrong.
27:33 So you never touch a stop loss.
27:36 It trips, you're done, move on to the next thing.
27:39 Your profit target,
27:41 you can absolutely trail a profit target, right?
27:44 I mean, nobody's like, nope, that's as far as you go.
27:46 That's what I analyzed, I'll take my money.
27:49 No, you know, like, if it's still rolling,
27:52 you can use the dynamic trailing profit stop
27:55 to try to capture a little more alpha, that's fine.
27:58 But on the stop loss side, it's inviolable.
28:03 That's the critical thing with risk management.
28:05 None of us do that.
28:06 There is no, I'm out at this level.
28:09 Well, I looked at it, I changed my mind.
28:12 That's how you get your face blown off
28:14 by something like GameStop.
28:16 Like how many funds, how many traders,
28:19 because that was just insane.
28:21 How many traders saw this?
28:23 It went blue through their stop loss,
28:27 like on the short side, and they're like,
28:29 no, this is ridiculous.
28:31 I'm not gonna do anything about it.
28:32 I'm just gonna, this'll correct tomorrow.
28:36 And then what happened the next day?
28:37 It's like 200%, then it's 400%, and you're dead.
28:40 Your broker's calling you,
28:41 and you've been murdered at that point.
28:43 So like, it hits that, the bottom line is you're wrong.
28:47 Your analysis was wrong.
28:48 Take the loss, move on.
28:50 If it keeps happening, because you should review
28:53 all of your losses as well as your wins,
28:57 go back and look, and if you're slightly off all the time,
29:01 like you would have been right,
29:03 then work on, like maybe your stop loss is way too panicky.
29:07 It's just too tight, and you're too conservative
29:11 in your run gain analysis.
29:12 Oh, I think it's only gonna be a couple points,
29:14 so I can only afford this much on the downside.
29:17 That won't help you either.
29:18 You'll just stop out all the time.
29:20 So you need to determine whether that's the case.
29:23 - Yeah, and again, I mean, like setting the stop losses
29:27 and things like that, I think are a lot of things
29:29 that as retail traders, we don't like to do,
29:32 'cause a lot of us think like, oh, you know, we're so great.
29:34 I don't need a stop loss, why?
29:36 And then you learn kind of over time the hard way
29:38 why it's probably a good idea to have those in there.
29:41 What-- - Well, you don't have it.
29:44 You haven't done the math, right?
29:46 The bottom line is if you haven't put that on,
29:48 you've done no run gain analysis,
29:50 you've done no risk analysis.
29:51 That's your admission to yourself.
29:53 Is there a stop loss there?
29:54 No.
29:55 Okay, you did no risk mitigation.
29:57 So when you get blown up later, that's probably why.
30:01 I should point out that we're really talking about option,
30:03 or sorry, equities trading here.
30:06 We do not use stop losses for options
30:08 because the spreads get really wide, especially at open.
30:12 And you've seen them bubble up five minutes to the close.
30:15 And you can easily get blown out accidentally on a stop loss
30:19 by an eager broker and a blown out spread.
30:23 So we don't use them for options.
30:25 We set the point and we start to attempt to get out
30:29 when that's tripped.
30:31 So when you're, you know, if you're looking at mid to ask
30:34 or mid to bid and that threshold gets tripped,
30:39 you can try to exit at that point.
30:41 You're starting to work your exit.
30:44 But we don't use just a hard stop loss
30:47 for the reason I just mentioned, for options.
30:48 - Yeah, and I've actually had that before
30:51 on my options trades where I've had like a stop loss
30:54 and on there and I'll get stopped out
30:56 and then I'll look at it like two seconds later
30:58 and the option value of this way back up
31:00 like two minutes before where I like way above my stopper.
31:03 I'm like, why did I just get stopped out?
31:05 - Yeah, I mean, you have like, you know, a tighter spread.
31:07 It's like, you know, 360 by 380.
31:12 And then, you know, five minutes into the close
31:14 that blows out to 360 by 750.
31:18 Like that's not real.
31:20 And you'll get some broker that's like, well,
31:23 yeah, it's in there somewhere.
31:24 Cool, bye, boom.
31:25 And you get blown up and it's like, okay, that's, ah.
31:29 So we just, we don't use them for that.
31:31 We just mark the number and keep an eye on it, set alerts.
31:34 - Okay, so Ryan, how do you go about increasing
31:39 and maximizing your asymmetry
31:42 when it comes to having these trades?
31:45 - If you, okay, so if you do your basic analysis
31:50 and this is gonna require a little more math on your part.
31:54 It's something that if we do like a second educational
31:57 series and we do like a little more advanced stuff,
31:59 we can get into the calculations,
32:01 how you would wanna do this.
32:02 But if you've done, so let's say you do your run gain
32:05 analysis and you set your, this is an acceptable threshold.
32:10 That's where I think support exists.
32:12 And stop losses, by the way, are always below support,
32:15 not above support, not in the middle of support,
32:17 always below support.
32:18 So whatever your support range is,
32:20 the stop loss is under that.
32:22 Otherwise you're gonna get taken out prematurely.
32:25 So you've set this up and you still feel like
32:28 this is a really good trade.
32:30 Like all of the signals are there.
32:32 It's not a cowboy stock.
32:34 You've done your analysis and you are positive
32:37 that this is going to work,
32:39 but you can't get this to be better than like,
32:42 let's say 1.5 to one, like, or 1.2 to one.
32:47 Like it's about even risk versus reward,
32:52 but you think that the probability of success
32:56 outweighs the lack of substantial
32:59 asymmetrical return on risk.
33:01 You wanna do this anyway.
33:02 Okay, so what can you do to skew
33:05 the asymmetrical return on risk in your favor?
33:08 This is what we do.
33:09 We use long options in the opposite direction
33:13 and a limited number.
33:14 So I'm buying my $10 stock and the $10 stock
33:19 is for sure, 100% guaranteed gonna make it to 1150.
33:24 Like I know what it's gonna do.
33:25 Look at it.
33:26 Everything is pointing.
33:27 I got nothing but green lights across the board
33:30 everywhere I look, all my analysis,
33:32 but supports nine bucks and it's pretty established support.
33:37 Like there's not a lot between nine and 10.
33:39 So if this makes a run at 1150 and fails,
33:42 it's probably gonna fail all the way down to nine.
33:46 So I gotta put my stop loss there.
33:48 My asymmetrical return on risk sort of sucks.
33:51 So I wanna trade this, but I don't wanna accept this.
33:55 So what I can do is I can buy a limited number
33:59 of below the market put options,
34:01 which will increase in value as the stock collapses, right?
34:06 So as the stock is collapsing,
34:09 I'm not losing exactly dollar for dollar.
34:12 Like I'm not losing the whole dollar between 10 and nine.
34:17 I'm losing part of that dollar, right?
34:20 Because the put options are now gonna make me
34:23 a little bit of money.
34:24 I don't recommend using at the money options for that.
34:28 You would wanna use the next strike out of the money
34:31 and depending on the volatility of the stock
34:35 and the proximity to expiration.
34:37 So how much gamma is going to impact this.
34:42 You're gonna pay, you could pick further out of the money
34:45 if that makes sense.
34:46 You can do a calculation.
34:48 I mean, we're talking about here,
34:50 like generally swing trading.
34:52 Position trading, you wouldn't do this
34:54 because it's going to eat way too much in terms of theta.
34:58 Like you're not buying quarterly options
35:00 and leaving them on for 60 days.
35:01 Your premium's just gonna get eaten by theta.
35:03 So that's not a good way to do it.
35:05 For swing trading, you buy a limited number of put options
35:08 or if you're shorting something,
35:10 a limited number of call options.
35:11 And then you're out, your exit is a net of $1
35:16 which will let you go lower than the $9 mark.
35:21 You're not buying the options one to one
35:24 or more options than you have stock.
35:26 So it's not gonna get better and better and better
35:28 as it collapses.
35:29 It's basically gonna offset some of the loss.
35:32 So by doing that, you're going to be able to turn something
35:35 that's 1.5 to one into like three to one or four to one.
35:39 So that's a trick that we, well, it's not a trick.
35:41 That's just, that's how the business works.
35:43 So we will use a limited number
35:46 of inversely correlated options on the long side
35:51 in order to offset that crappy asymmetrical return on risk.
35:56 - Beautiful, I like that a lot.
35:58 I might have to start implementing some of that myself, Ryan,
36:01 let you know how it goes.
36:03 We kind of touched on this earlier.
36:05 We've mentioned Renaissance being just above a 50% win rate
36:08 but how often, if you are properly,
36:12 kind of getting more back from your winners
36:15 than you are losing on your losers,
36:18 how often can you make the wrong trade
36:21 and how often do you need to be right
36:22 in order to be profitable?
36:24 - So there are two things required for an edge to be valid
36:30 in my opinion, right?
36:31 So an edge is simply a trading strategy
36:36 that is repeatable and profitable.
36:39 And that is one, you need a better than 50/50 chance
36:44 of A happening instead of B.
36:46 So a win versus a loss
36:48 and you need an asymmetrical return on risk
36:50 that is usually present.
36:52 So some derivatives, some ETS, some gap ETNs,
36:59 gap reliably over and over again in the same direction
37:04 but when they fail,
37:05 they gap like three or four times the wrong direction.
37:08 So that's an example of something
37:10 that has like built-in winners
37:13 but the losers just whip your ass
37:16 and you have no idea when those things are coming.
37:18 So there's no actual edge there.
37:21 It seems like there is, but there isn't.
37:23 But to answer your question,
37:25 you really do not need to win more than 50/50
37:29 if you make sure you trade two to one or better.
37:34 Think about it, you got $10, right?
37:36 And you got 10 bets, buck a bet.
37:39 Five of those bets, you're gonna lose $5.
37:43 The other five, you're gonna win $2.
37:46 So at the end of the day, you're net plus five.
37:49 Like that's it.
37:50 You could have a worse return on risk than that
37:55 or you could win less four out of 10 times
37:58 and still make money.
38:00 And that's why it seems nuts
38:02 that you can be right like 22% of the time
38:05 and paying off your Ferrari
38:07 but that is absolutely the truth.
38:09 If you have a strategy or discipline enough
38:13 and edge that can return something like five to one,
38:16 I don't have that.
38:17 So me three to one, four to one,
38:19 something like that is what we aim for
38:22 and we manipulate it using options whenever possible.
38:25 Frequency helps.
38:27 Again, I'm not a big proponent of like frantic trading,
38:32 like I have to trade every day and massive random turnover.
38:36 Trade as much as makes sense given your strategy
38:40 but that's the biggest takeaway
38:43 is you don't feel like you have to be right
38:45 like eight out of 10 times.
38:46 You do not have to be.
38:47 And if you try to do that,
38:49 you'll spend a lot of your time very unhappy
38:52 and dissatisfied with your performance needlessly
38:55 because the rest of us are not right eight out of 10 times.
38:58 We just make more money when we win
39:00 and we don't lose a lot when we lose.
39:02 That's the key.
39:03 - Interesting.
39:04 What, I mean, we also discussed earlier
39:10 kind of how important it is to be able to take emotions
39:14 out of trading while you're doing this.
39:16 How does having an actual strategy help
39:19 when things might get a little,
39:21 if emotions are running hot or you're feeling very frantic
39:24 or maybe on the other side, you're feeling very,
39:27 oh, this is awesome.
39:29 I just hit 10 trades in a row.
39:31 I'm on top of the world.
39:32 How can having a strategy help in these situations?
39:36 - Yeah, I mean, it forces you to have a cold hard look
39:39 at the decision you're about to make, right?
39:41 I mean, that's the bottom line
39:43 is that if you don't have these rules,
39:47 if you don't do a risk analysis,
39:50 if you kind of eyeball it,
39:52 then you can make these emotion filled trades.
39:55 I'm feeling good about this, been good to me.
39:57 Like, I mean, we've joked before.
39:59 Like there was a year when I wanted to send Apple
40:03 a gift basket, right?
40:04 I mean, like I was just right every single time.
40:08 It was paying for tons of stuff for me.
40:10 I felt fantastic.
40:12 But that's a random distribution of wins and losses.
40:15 And I was on the right end of that particular year.
40:18 Now posted permanently in our trader Slack chat,
40:22 well, not permanently, just nobody's taking that down.
40:25 It says, yes, Apple is still on my shit list.
40:27 Like, I don't know when that got put up,
40:29 probably three years ago,
40:31 but you have these ebbs and flows of being right and wrong.
40:35 And having a system in place
40:37 forces you to confront the decision.
40:40 You do this run gain analysis and it's not good.
40:44 You have to do it anyway, knowing that it's bad.
40:49 And usually I find that's enough to stop
40:52 most retail traders, most traders period,
40:55 from making a bad decision.
40:57 You know, you see the outcome.
40:59 It's like, okay, I have to be,
41:02 if I'm gonna keep doing this,
41:03 I gotta be right 83% of the time.
41:06 You know you're not right 83% of the time.
41:09 So you may take your finger off the trigger
41:11 and you may step back.
41:13 So that really helps with the emotionalist trading.
41:16 That small lot size and the largest distribution
41:21 across all of your candidates
41:25 is part of the basics of a systematic trading strategy.
41:28 Right?
41:29 It's like, look, I don't care if I'm right all the time.
41:32 I don't need to be because I only fire things off
41:34 that are three to one.
41:36 My lot sizes are small.
41:38 So when I do take a hit, it's not very painful for me.
41:41 It's a small hit.
41:42 When I take a win, it's not a huge win either.
41:45 So I don't get euphoric and get that like,
41:48 I can't be harmed sort of full sense of confidence.
41:53 And then I distribute these across as many candidates
41:56 as I can find and I'm comfortable with.
41:59 And I let the law of large numbers work for me.
42:01 So if you have four, five, six losses in a row
42:04 in that situation, you don't take them
42:07 like you do when it's all on gut and emotion,
42:10 because you're like, yeah, I'm supposed to have four,
42:13 five, six losses in a row.
42:14 That is baked into this strategy.
42:16 I guess I got them this week.
42:18 And you could just go on with your day
42:20 and spend time with your friends and family
42:21 or whatever it is and not be brooding about,
42:24 oh, I suck.
42:25 Why can't I get this?
42:27 Everyone's smarter than me.
42:28 They're not.
42:29 And this system will absolutely flip in your favor
42:31 so long as you validated that you have the edge
42:34 that you think you have.
42:35 So that's where it comes into play the most.
42:39 - Yeah, and I mean, I think I've had it both ways,
42:43 where my emotions have been running hot
42:44 because I've been losing and I don't know what's going on.
42:47 And I've been, oh my God.
42:48 And I've had it where, oh my God,
42:50 so euphoric 'cause I just made so much money
42:53 and then I trade it all away the very next day
42:55 'cause I think I'm on top of the world
42:56 and I'm gonna be the next renaissance guy,
42:59 Jim Simons, that's gonna make.
43:01 So I think being able to implement a strategy
43:03 would definitely behoove myself
43:05 and probably a lot of people listening,
43:07 if I had to guess, Ryan.
43:09 - How has your elements of your strategy changed
43:13 as the chief investment officer over at Kaiju
43:17 versus when you were in my shoes
43:19 as just a lowly retail trader?
43:22 - Well, I wouldn't say,
43:24 I wouldn't use the term lowly retail trader.
43:27 It's, I mean, obviously risk management
43:28 is just a different game at an institutional level, right?
43:33 I mean, we have an enormous number of tools
43:36 that are just geared to risk management.
43:39 The options guys here, the Vol-Arb guys,
43:42 they use three or four separate tools
43:46 to calculate surface model integrity
43:50 and deal with projections and like look at term structure.
43:55 And they do a lot of math to determine whether or not
43:57 this is gonna work out,
43:58 how it fits into a very complex portfolio holistically.
44:02 Like if this goes down, what's it likely taking with it?
44:06 Do I have systemic risk in this portfolio?
44:08 Like is everything tech?
44:10 So I could be, I've applied my strategy perfectly,
44:15 I've done my risk assessment, I've allocated small,
44:18 I've allocated across a large number of candidates,
44:21 but I haven't paid any attention to my concentration.
44:24 And so I happen to be all accidentally in semiconductor
44:29 or semiconductor exposed stocks.
44:31 And then there's production fears, the semis tank,
44:36 and my whole portfolio goes with it.
44:39 And I have no inversely correlated assets to offset that.
44:43 Okay, so that's what it is at an institutional level.
44:48 I mean, like my Bloomberg is not actually set up
44:51 to trade stocks at all.
44:52 It's to identify portfolio,
44:55 systemic and holistic risk within a portfolio, right?
44:58 So, that's simply the difference between the two.
45:03 When you're starting out, you're really looking at risk
45:05 from a discrete trade perspective, that trade.
45:09 Nvidia today, this run,
45:12 I think it's gonna go here by the end of the week,
45:14 this thing, and then the next one,
45:15 and the next one, and the next one.
45:17 And as you become more sophisticated,
45:20 you're gonna start stepping back
45:22 and start looking at these collectively.
45:25 Like if you've just traded Nvidia,
45:27 do you need to trade AMD as well?
45:30 You may have seen exactly the same pattern in that.
45:33 Yeah, they're both semis, or semi, semi exposed.
45:37 So, pick one, don't trade both of them.
45:41 You're getting the same price action,
45:43 probably between the two,
45:44 if they're lining up identically,
45:46 'cause they're responding to the same stimulus.
45:49 Then pull up SMH, like look at that.
45:51 If you're really into semis, does that have the same setup?
45:55 Now you have broad exposure to the sector.
45:57 So, maybe pick that instead.
45:59 You start to ask these types of questions,
46:02 and then consider inverse correlated opportunities.
46:07 If you're wrong, I mean,
46:08 all the index ETFs have inverse opportunities.
46:13 You've got the small Qs, right?
46:14 Like you could take the SQs,
46:18 and if you're concerned about a tech collapse,
46:22 it's a quick one-stop go-to shop, right?
46:25 And you don't have to short it,
46:26 you can buy it long,
46:27 and it'll start ticking up while everything else ticks down.
46:30 So, you look at it from that perspective,
46:32 more than you would when you're just starting,
46:34 and you're like, "I'm trading gold,"
46:35 or "I'm trading whatever it is."
46:37 - Yeah, and again, guys,
46:40 I mean, what we've been discussing today
46:43 is all about how to mitigate your risks,
46:46 in the sense that you can still set yourself up
46:50 to have a winning strategy,
46:51 to making money over time in the market
46:54 without necessarily putting everything at risk.
46:56 In fact, you're not going to have a winning strategy
46:59 if you don't manage your risks properly.
47:02 So, if anything, at any point,
47:06 you wanna go back and listen to what we discussed today,
47:08 you will be able to just rewind
47:10 once this video is posted to YouTube.
47:12 Ryan, we've discussed so many things today.
47:14 We've had a great conversation,
47:16 running a little bit long on time,
47:17 but let's get to our Kaiju kicker,
47:20 our big takeaways of the day.
47:23 Let me go ahead and pop this up on the screen,
47:25 and then how about you walk me through them real quick?
47:27 - I was gonna plug my ears.
47:28 I thought I was going through
47:29 that rock video bumper thing again.
47:31 It's like, that's always deafening.
47:33 Okay, no, we got just a slide.
47:35 It's perfect.
47:36 Okay, so this is,
47:37 I didn't come up with plan the trade and trade the plan.
47:41 That was something that was said
47:42 when I started trading all the time.
47:45 A pro equities trader that I worked with in the beginning
47:50 had that actually taped above his computer monitor.
47:52 I do not know where it came from,
47:54 but everybody says that, and it's not wrong.
47:56 So title of the slide, let's go with that.
47:58 Never alter your fundamental trading plan
48:01 after you've agreed to it with yourself, right?
48:03 So it doesn't matter what you've decided to do,
48:05 position, swing, momentum, even intraday,
48:10 please don't do it, but even if you're intraday,
48:12 have a contract with yourself.
48:14 This is the outcome, here's where I'm out.
48:17 That's right, this is wrong.
48:18 If you're right, you can be more right, that's fine.
48:20 You can alter that part.
48:22 I wouldn't say alter,
48:23 but you can adjust to eat more profit out of it.
48:26 When you're wrong, you're just wrong, move on.
48:28 Never trade anything that's not at least
48:30 a two to one asymmetrical return on risk.
48:32 Try for three to one or higher.
48:35 And that will just work with you
48:38 not having to have an unrealistic win rate
48:41 in order to make money.
48:43 Do consider small numbers of long options
48:45 to change the risk ratio of a trade
48:48 without altering the trade plan.
48:50 So again, you're pretty sure this is a good trade
48:54 and it's a solid plan, but you can't get the numbers
48:58 to work the way that you'd like to.
49:00 Model some long options in either direction,
49:03 depending on if you're long or short,
49:05 to skew that return on risk
49:08 to something that is more like three to one.
49:10 And then remember, it's your net.
49:12 So in your trading software, if it's TWS, whatever,
49:15 you're gonna combine those positions.
49:17 So you're seeing the net outcome
49:19 and the net outcome is the minus one of the three to one,
49:24 you're done option and equity.
49:27 Do not let your hedge run.
49:31 That's something I wanted to add that's important.
49:33 So if the stock is still collapsing
49:35 and that put option is kicking out
49:37 more and more and more money, do not let it run.
49:40 It's so tempting.
49:41 It's like, well, now I got a winner on this side.
49:43 You never did any analysis on that trade.
49:46 That's not a primary trade.
49:48 You only ever accepted that as a hedge.
49:51 So when it's met its use, unload it and move on.
49:55 And then always use a good till cancel stop loss
49:59 or a trailing good till cancel stop loss
50:01 for a tighter intraday exit.
50:05 Always, always, always, not day only.
50:07 You're gonna forget to set it the next day.
50:09 - I've run into that problem before.
50:11 I've set a stop loss that expires at the end of the day
50:13 and then the next day, it's like down this much.
50:15 I'm like, wait, I thought I had a stop loss on this.
50:17 - Every stop loss is GTC.
50:20 You do not use day orders for stop loss.
50:22 - Remember that, GTC.
50:24 - GTC, good till canceled.
50:27 Always use one.
50:28 Follow that and you should be in better shape
50:31 than I'd say 95% of retail traders.
50:34 - Yeah, that's like, I don't know.
50:37 I was gonna make a joke about people getting canceled.
50:40 Someone's good GTC, they're good till canceled.
50:44 All right, well, Ryan, this is again,
50:46 has just been great information today.
50:48 Cannot stress enough to the audience out there listening.
50:52 Really like, I mean, in terms of everything
50:54 we've discussed so far,
50:56 what can help take your trading to the next level?
50:58 What can help set you up to have a winning strategy?
51:01 'Cause if you're just going out there willy nilly,
51:04 trading what you like,
51:06 trading what you see people talking about
51:07 on Twitter and Discord, you might have a good day.
51:10 You might have a good week.
51:11 You might even have a good month,
51:13 but chances are you're not gonna be able
51:15 to sustain that over time without some
51:17 of this risk mitigation strategy that we've discussed today.
51:21 And really again, it all boils down to,
51:24 are you winning more on your winning trades
51:27 than you are losing on your losing trades?
51:30 Because you could not bank on having over a 60% win rate
51:35 or whatever you would need to have
51:37 if everything was 50/50.
51:38 If you lost all the exact same amount
51:41 that you won on every trade,
51:43 then you would need to have a win rate
51:46 that is essentially impossible to maintain.
51:49 So this is the way to do it.
51:51 And it's honestly, I mean, like you said, Ryan,
51:53 it's not as sexy as saying,
51:54 hey, nine out of my 10 picks are correct.
51:57 Hey, every single time I place an options trade,
51:59 it's right, hey, buy my picks.
52:01 Like, no, it's not that sexy.
52:02 Instead, it's I'm very meticulous.
52:05 I'm diligent about mitigating risk,
52:08 about making sure I'm winning more
52:09 than I'm losing on my trades.
52:11 And then if you do that,
52:12 then over time, you should be okay.
52:16 - The wealthiest managers on the planet
52:19 do not have, by and large,
52:22 a better win rate than six out of 10.
52:25 Like, just let that sink in, accept it.
52:28 If you're like, well, my average is 90%.
52:31 Yeah, this week, this month, right now, whatever.
52:35 But over time, it won't.
52:36 I've spent part of my career with an 83% win rate.
52:40 Enough to be quoted as having that, it didn't last.
52:44 Favorable market condition, you could totally do that.
52:46 But over time, overall, it's this that's gonna make you
52:50 the money and not the win rate.
52:52 - Got it.
52:54 Well, Ryan, again, thank you so much for hopping
52:57 on Benzinga Live today.
52:58 - Always a pleasure, Aaron, always a pleasure.
53:00 - We will be back next week,
53:04 so make sure to tune in because I don't know.
53:06 I mean, I guess we gotta discuss the scheduling
53:09 because next week we'll-- - I think we're doing
53:10 order entry, are we doing actually order placement
53:13 and order management next week?
53:15 - I believe so, but I was saying, so next week,
53:17 you guys wanna tune in because we'll probably,
53:19 the next week, I assume, be off during the week
53:23 of Christmas, or at least I'm not sure where I'm gonna be.
53:27 But next week, again, make sure to tune in.
53:30 We'll be discussing, we'll be taking, again,
53:32 we're taking little baby steps here.
53:34 We're getting, you know, we're now at the point
53:36 where we've talked about how to set up
53:37 your brokerage account, what indicators to use,
53:40 how to mitigate your risks, and then, yeah,
53:43 again, next week, we will be talking about orders
53:46 and how to, again, just take that next step.
53:48 So by the end of this course, I mean,
53:51 you guys should be able to, you know,
53:53 I'm not saying that you're all gonna be trading
53:55 like professional traders, but you'll have
53:57 all the information to allow you to make
53:59 more informed trades, to allow you to make
54:01 more informed decisions, and it's like anything else.
54:04 The more you do it, the more you'll learn.
54:07 You'll probably screw up a little bit,
54:09 and then, you know, you'll learn from those mistakes,
54:11 and then you'll go, oh yeah, okay,
54:12 that's why Ryan said that.
54:14 That's why Ryan said to put that stop loss in.
54:16 Oh yeah, now I remember.
54:17 And then, eventually, you know,
54:21 we'll all be making money in the market, right, Ryan?
54:23 - Let's hope so.
54:24 That's the goal, right?
54:26 - That is the goal.
54:27 Well, again, yeah, thank you again for hopping on.
54:31 We will be talking about, yeah,
54:33 we're just talking about all order types next week.
54:37 Do not wanna miss that.
54:38 Same time, same place, 11 a.m. Eastern on Tuesday
54:42 here on Benzinga's channel.
54:44 Ryan, thank you again.
54:45 I'm gonna drop the links in the chat to KaiJude,
54:47 the ETF, if you guys wanna learn more
54:50 about what Ryan's working on,
54:51 over when Ryan's actually working,
54:53 and when he's not giving us his precious time
54:55 here on the show.
54:57 - Sounds good.
54:58 Slavin' away.
54:59 - There you go.
55:00 - In the eye of magic, that's it.
55:01 That's it.
55:02 All right, Ryan, we'll take care. We'll speak next week.