In today’s episode, you’ll discover how to trade without a stop loss (and without blowing up your trading account).
So tune in right now…
Hey, hey, what’s up, my friend? Here’s the thing, is it possible to trade without a stop loss and also without blowing up your trading account?
I’m sure many of you watching this right now will know that yes, you can trade without a stop loss. But the downside to this is there will be a time when you encounter a loss so huge that it wipes out all the small profits that you’ve accumulated along the way.
What usually happens next is that you end up wiping out your trading account as well.
Now, the question is, is it really possible to trade without stop loss and also without blowing up your trading account? Well, the answer is yes.
In today’s episode, I’m going to share with you 4 techniques that you can consider. You can even explore more about them if they’re suitable for you.
Let’s get started.
Technique #1: Spread trading
Many of you might not be familiar with this term called spread trading. But the idea behind it is that you are trading a spread. What is a spread?
Let’s say you noticed that the difference in the price of Coca Cola shares and Pepsi shares are usually $4, where Coke is trading at $10 while Pepsi is trading at $6. There’s a difference of $4.
Let’s say in future, Coke’s share price goes up in to $20 and Pepsi’s share price goes up to $16. Again, their price difference is $4. Certain markets and certain stocks they have this kind “fixed price differential” which is constant over time – that’s the spread.
Of course, there are times when the spread fluctuates up and down. And that’s when a spread trader can take advantage of the fluctuation.
Let’s say Coke and Pepsi’s price differential is $4. One day, you’re looking at the charts of Coke and it’s $25 while the price of Pepsi is $20. Now the price differential is $5, instead of the historical $4 price differential that was constant over the years.
What you can do is to trade this spread. You would realize that now Pepsi is kind of undervalued because its price is lower than what it should be.
So what you can do is to buy Pepsi shares and also sell Coca Cola shares because you would expect this price difference to converge to $4 in the near future.
And let’s say in the near future, the price does converge, where Coke goes up to $30 and Pepsi goes up to $26. Now, their price differential from $5 has converged to $4.
Since you’ve bought your Pepsi shares earlier, now you can sell your Pepsi shares and buy back your Coca Cola shares, which you shorted earlier.
This is what we mean by spread trading. This is an advanced form of trading. But in this type of trading, you are pretty much trading without a stop loss, because you’re kind of “hedged” in that sense. This is what we call spread trading.
This is how you can also use this technique or methodology to trade without stop loss and without blowing up your trading account.
Technique #2: Buying call or put options
When you buy a call or put option, you don’t have to worry about stop loss. Because a call option is a contract that allows you to buy an asset at a certain price in the future. If anything happens to the options contract that you’ve bought, it will expire worthless.
Let’s say you want to buy a house, and the house that you want to buy is only built one year from now. What you can do, for example, is to enter a call option to buy the house at $500,000. So in one year, you will be billed $500,000 for that house.
But of course, the call option won’t be free. The call option could cost you $1,000 and it is a contract to buy that house that will be built one year from now, for $500,000.
Let’s say one year later, that house that you thought will be priced at $500,000 is now worth $600,000 instead. You can now use your call option to buy that house at $500,000. That’s how you make a profit by buying that call option.
Let’s say one year down the road, instead of having the house price at $500,000 you have a change in mind or a change in financial decision, you don’t want to buy the house anymore. What happens is that the call option that you have that you bought for $1,000 will just expire worthless. This is how the call option works in the grand scheme of things.
You can see that if you were to buy call options or put options, the worst that can happen to you is that the option that you have bought will expire worthless.
This is not going to be true for all types of options trading, especially when you start shorting or trading naked option. This that I’ve shared is just a very simple example where I talk about, buying a call option or buying a put option.
Technique #3: Time stop loss
Most of you are familiar with using a stop loss at a predetermined level, where if the price hits that price level, you’ll exit the trade. A time stop works differently in the sense that you only exit the trade if a certain amount of time has passed.
Let’s say you buy a stock when it breaks above the 200-day high. You can use a time stop where if the stock doesn’t go up more than 2% over the next two weeks, you will exit the trade.
This is what we call a time stop loss, where you put a time factor to determine when you’ll exit your trade to cut your loss.
Technique #4: Time stop loss (continued)
This last technique that I want to share with you is not really a technique, but to explain when a time stop loss would work – it works when you’re trading without leverage.
If you were to trade with leverage then the time stop loss will be quite irrelevant. Because if you’re on leverage and if the market dropped 50% against you, you are essentially wiped out.
Even though you are using a time stop loss, if you are trading with leverage then that time stop loss won’t work well. If you adopt a time stop loss approach to your trading, you cannot use leverage. That is the key thing.
For example, if you want to trade stocks and adopt a time stop loss approach, you cannot be using leverage, else If the market moves against you by too much, you could end up wiping your trading account.
That’s the key thing I want to share with you if you want to adopt a time stop loss approach. Leverage is something that you can use, but use it as sparingly as possible because that will affect the drawdown that you encounter.
With that, let’s do a quick recap on how you can trade without stop loss and without blowing up your trading account…
- Spread trading
- Buying call or put options
- Time stop loss technique – different from the type of traditional stop loss that you’re familiar with
- Time stop loss technique (continued) – you must not use leverage when using a time stop loss
With that said I wish you good luck and good trading. I will talk to you soon.