 Welcome back to the Trade Hacker Mindset. In this episode we are going to discuss the five keys to building self-confidence in your trading. Trading the markets can be difficult to master and seemingly just out of reach. Professional traders have a secret. Trading requires total mental and emotional control. It requires the Trade Hacker Mindset. All right, so let's jump into this discussion of the keys to building self-confidence in your trading. This topic really came about because over the years I've gotten emails and posts in our communities that go something like this. They'll ask the question, you know, how do I get over my fear of losing? Or some statements just like, I'm too scared to take any trade at all right now. Or I've heard things recently like, how do I get over cutting my winners too quickly? In other words, they get into a trade and then as soon as they see any little bit of profit, they take it off the table. So I want to focus on five key things that I think will really help you in building that self-confidence. Number one, change your focus from making or losing money to the actual process of trading. You can't control the market, but you can control your entry and your exits. In episode 26 of this podcast, the title is learning to trade an edge like a casino. If you haven't listened to that, go back and listen to it and I outline a process that Mark Douglas talks about in his book, Trading in the Zone, where you're actually doing segmentation of your trades into blocks of 20 trades and you're taking very specific criteria, whether it's part of your overall trading strategy or methodology right now or not, go through this process and document your trades and see how that comes out. That's really going to help you focus on the process of trading as opposed to your P and L of your trading. And to do this exercise leads us to key number two, which is all about position size. You have to scale down your position size. Now you can also do paper trading, but the problem with paper trading is that there is zero emotional attachment to your trade. So instead of paper trading, I would really emphasize trying to just scale down your position size to a nominal amount. If your normal position size is $500, scale it down to $100. If your normal position size is $50,000, scale it down to $10,000, bring it down to an amount that is so much smaller than your normal position size that the P and L swings are going to feel fairly insignificant as it relates to your personal risk tolerance. So if you're trading option strategies on SPX, scale it down to SPY. SPY is one-tenth of the size of SPX. If you're trading futures and you're trading the S&P 500 ES futures, scale it down to the micro, which is one-tenth the size. There's always a way to get smaller. Tastyworks just came out with, not just, but in the last couple of years, they came out with futures that is actually called the Small Exchange. And these are just super small futures contracts that have very little buying power requirements and allows you to get very, very small with your trade size. If you're trading options, the lower the price symbol that you trade typically is going to have a lower volatility or at least a lower buying power requirement and a lower P and L swings. So scale down. There's always a way to scale down. Remember, you can't control the markets, but you can control your position size. In every single one of our strategy courses, we outline a position size and a lot of strategies that we trade, that we teach, it depends on the strategy, but for a lot of them, we always talk about don't ever risk more than 5% of your account size on any one trade. And don't risk any more than 30% of your account size on any one strategy. Now listen to what I said. Those are the max. The max is 5% of your account size on one trade. The max is 30% of your total account on all trades for that strategy. It blows my mind how naturally traders come in and they think that is the position size that they should be using. No, no, no. I said that is the max position size. There are a lot of times where I will trade less than 1%, less than a half a percent of my account value on one specific trade. And your account size is really not relevant. So I mean, you could have a $3 million account. That doesn't mean you need to be maxing out the amount, the size that you trade. It's kind of funny. The last podcast we did was about following other traders and we posted it. And we got a comment, I think it was on Facebook, of somebody who says, you know, it's pretty irrelevant that you post how much you made if you don't post your account size. And I kind of thought, well, that's actually the opposite. It's actually irrelevant. If I have a, you know, when I'm day trading, as I continue to grow that, I take money anytime the account gets over $40,000 and I bring it down to about back down to about $30,000, which is above the pattern day trade rule. So I don't have to mess with any of that. But the account size is irrelevant. I'm trading the position size that I'm comfortable with from a risk tolerance standpoint, you know, as I'm streaming live and doing things, you know, I'll trade bigger size if I'm not live, if I'm not streaming live, because I can focus just on the trading, I'm not focused on talking and looking at different screens and the chat and everything else. But the account size is irrelevant. You know, if I have, if my day trading account that I'm using during my live stream is $30,000, that doesn't mean that I'm maxing out the buying power of every position that I'm taking. Sometimes I come into the day and I just feel like taking smaller position size. Sometimes I come into the day and I really feel like I'm in tune with the market and I'm scaling up my position size. The account size doesn't have anything to do with it. For my non-day trading accounts where I'm trading our income strategies, I have a very large account. But that doesn't mean I'm always at 30, 40, 50, 60% of my account size with all my positions. And that certainly doesn't mean I'm using 5% of my account value on each individual trade. So the account size is irrelevant. It's your risk tolerance. And when you are trying to figure out your process and you're trying to figure out, you know, if you're in a drawdown and you're trying to build out of that, or you're having fear of losing money, or you're, or you're having fear of even taking trades, the account size is irrelevant. What's relevant is the position size that you take based on the risk tolerance, based on your feelings of how you feel based on the P&L swings that you're seeing for each particular trade. Alright, so key number one, change your focus from making losing money to the actual process of trading. Number two, scale down your position size. And number three, have an absolute defined amount of risk on every trade. So if you're trading stocks or you're trading futures, maybe you're using a hard stop loss, okay? I don't recommend using hard stop losses for options. But if you're trading options, use a defined risk option spread. And the amount should be insignificant based on your overall risk tolerance. Going back to the example, if you're normally trading SPX, scale it down to SPY. If you're normally trading the ES futures, scale it down to the micro ES. Remember, you control how you trade, the market controls how and when you'll get paid. And number four, trade with rigid rules. We talked about expectations of trading in a previous podcast episode. And the one of the most powerful things that I think you need to keep top of mind in your trading is be flexible in your expectations but rigid with your rules. Be flexible in your expectations, but rigid with your rules. Most inconsistent or most new traders do the exact opposite. They're flexible with their rules, but they're rigid in what their expectations are of what they what they expect to make in their trading. You cannot control your P and L statement, but you can control whether you follow your trading rules or not. Your focus has to be on trading well. Your focus has to be on following your rules, not on making money. Because if your rules are sound, then the profits will come. Your confidence comes from self mastery. Your confidence comes from having the right mindset, hence the name of this podcast, the trade hacker mindset. And the fifth key to building your self confidence as a trader is preparation. Now, preparation also includes documenting your trades. It includes journaling all of your trades. It also includes just the overall preparation before you start trading. So the journaling and documenting is what happened after the fact, right? What happened after you took the trade. But the other part of preparation is what you're doing before you place trades. And this preparation is a mental exercise that helps you with creating this mental mastery. If you prepare your trade ideas for the day, if you're day trading, if you prepare your trade ideas for the day, or if you're doing more swing trading, if you're preparing your trades for the week, you want to use what-if scenarios. Unfortunately, I get this email or post way too often, but it's the guy who says, I entered this trade. It's gone against me. Now, what do I do? Don't be the guy who says, what do I do now after the trade goes bad? Successful experience. It's a very powerful source of mastery. And the mental rehearsal of trading plans under various what-if scenarios, it really generates a form of experience in our minds. A prepared trader actually expects to win. An unprepared trader is more like a gambler. And there's a huge difference between somebody who's self-confident and someone who thinks positively. Self-confidence is not expecting the best. It's knowing without a shadow of a doubt that you can handle the worst. So if you're placing trades just expecting the best to happen and something goes wrong, you're not going to know how to handle that. But if you place a trade and be thinking in a what-if scenario, what's the worst possible situation? And if I get in that situation, how am I going to handle it? You're going to be a lot better prepared if or when, because eventually it will happen, a scenario happens where you need to adjust and pivot. Just thinking about today specifically today at the time of this recording is Wednesday, September 22nd, 2021. And in our alerts portfolio, we had a lot of what we call our iron duck strategy. We had a lot of selling premium type strategies, iron condors, short strangles, that kind of thing. And just over the last, just within this last couple of weeks, we've seen a pretty decent sell-off in the market. The market was at all-time highs and we're about 7% off of that all-time high if you're looking at the NASDAQ or the S&P 500. And then today, we're getting a pretty significant bounce in the market. The S&Ps are up about 1%, NASDAQ's up about 1%, Russell's up about 1.5%. And so my expectation is that if this market rolls over again and starts really selling off, what is the scenario that's going to happen with our overall portfolio? And so based on that situation, I came in today and made several adjustments to the portfolio. Number one, we were pretty Delta-neutral overall in our directional bias in the portfolio. In fact, we are a little bit long. And so this bounce today actually created some decent amount of profit. But the scenario is what's going to happen if this market rolls over. And so one thing we did is we started adding some short Delta positions, some short bias positions. We started taking off positions that already had a profit that were either long or kind of range-bound positions that could be hurt by a significant sell-off. And so we adjusted with the scenario in mind of what if. Now, if the market continues to climb and push higher, we still have a good amount of positions that's going to benefit from that. But now we needed to rebalance. We needed to readjust our portfolio to protect ourselves in the scenario that the market really sells off. And so that's exactly what we did. And so this is something that you should be doing every day. Whether you're coming into your day just as a day trader, where you're going home flat, you need to have a scenario in mind of what kind of position size you're going to be using. You're going to need to have a what if scenario of what if the market rips higher, what if the market rips lower, what if the market is choppy in sideways today. You need to put yourself in all of those positions and create a plan and a what if scenario for all of those situations. If you have a portfolio of strategies, just like I mentioned, you need to have a what if scenario over the next couple days, couple weeks to decide if X happens, I'm going to do this. If Y happens, I'm going to do this. And you need to have those scenarios played out. And I would even take it a step further instead of just thinking about it. I would actually write it down because that actually makes it more concrete if you write it down, because then it actually solidifies that concept in your mind of what you're going to do if that scenario plays out. Because remember, self confidence as a trader, it doesn't come from being right all the time. Okay, it comes from surviving the many times that you're wrong. Let me say that again, because as I was saying it, it just kind of created a light bulb moment and it couldn't be more true. So let me pound this point one more time. Confidence does not come from being right all the time. It comes first from surviving all the times that you're wrong. Because remember, we're wrong a lot as well. Sometimes we're right. Sometimes we're wrong. But that confidence comes from surviving those times that you're wrong. It doesn't, you know, when you place a winning trade, you don't learn near as much from that winning trade as you do from the losing trades. Your self confidence comes from successful experiences in that face of adversity. When we break our rules, and if we sustain a large loss, it actually traumatizes us. It creates kind of a helplessness instead of a confidence in our emotional mental well-being. The natural human nature is we actually create kind of a deep mental connection between trading and losses rather than trading and self confidence. It's actually a very big confidence builder to dig yourself out of a drawdown. A perfect example is, you know, if you're part of our community, one of our members, pro membership, you probably have followed Tim Weiss and his red strategy. And Tim was doing really well last year. And then about the first part of this year, first quarter, I can't remember exactly, you know, the conditions around this specific strategy weren't that favorable. And he started going into a drawdown. And he reports this every week. And he says, you know, here's the drawdown now. And here's where we're at and continually, weekly updating that. But what I admire Tim for is Tim continued to focus on the process. Okay, he didn't focus on the laws. He didn't, he didn't start revenge trading and upping his size. In fact, if anything, he scaled down his position size a little bit. You know, he didn't, he didn't jump to a new strategy and think, well, this just doesn't work. He learned from those, the environment that he was in, he learned from how the strategy acted in the environment. And he took that education, he took that new knowledge, and he's continued to make the strategy even better to understand how it performs in one environment versus another. And so it's the way that you perform during adversity that's going to determine if you're going to be a successful trader. Think about this. If you were to become a Navy SEAL, right, if you understand a Navy SEAL, they, when they go through training, they are put through severe mental and physical stress. Why is that? Why do you think that they just put them in situations that just create such crazy mental and physical stress? The reason is, is because once you've completed the training and you've gone through these brutal conditions, you have a deep, deep conviction that you can handle any situation, right? So if they go into a, after they've gone through this training and the training and they become a Navy SEAL, once they're put in combat or once they go on a mission and they are put in an environment that is just a crazy mental or physical situation that most normal people, most civilians couldn't handle, they've already been there. They've already gone through that situation. They can handle that situation and they have the confidence to be able to handle any situation because the training that they go through is most likely more brutal, more severe than any actual situation that they are going to encounter on an actual mission. So you have, as a trader, you don't have to go through all this mental and physical anguish that you do as a Navy SEAL, but you have to put yourself in the worst possible scenario before it happens. You have to create, let's call it fire drills. You have to create fire drills for yourself so that you're going through this process and you're going through the drill over and over of these what-if scenarios so that when you do find yourself in a situation where the market tanks or the market rips higher when you were expecting it to go down or whatever that scenario is, you've gone through the fire drill. You know how to handle the situation when the fire comes. Most successful traders have blown out their account at least one time. Some traders have blown out their account multiple times. I'm not naming any names, but he may be talking on this podcast right now, but I was talking to someone the other day, a friend of mine, shout out to my boy Landon. Landon is a young guy. I think he's only 22, but he's been trading for, and Landon, if you're listening to this, I apologize if I butcher this, but I'm not going to say any last names here, but Landon, he's been trading for three years. He's only 22, so I think he started trading when he was 18 or 19. He started with a pretty small account size, basically a gift that he got, I believe, for graduating from high school. He's built that into about 20 or 30 times the account size from when he started. I was sitting there talking to him, and I was kind of joking. I said, how many times have you blown out your account in this process? He said zero, which is absolutely not normal. I really started talking to him about this. One of the things he said was, when I started trading, and because I had a fairly small account, I couldn't afford to be sloppy or risk a lot. He studied and he just became obsessed, and he inundated himself with successful traders and how they did it. The thing that kept being repeated over and over and over was risk management. If you control your downside risk, the profits will come. He's just probably one of the most disciplined traders that I've ever talked to who's successful now. He just focused on that and never took any sizable losses that would take him under. I applaud him because that certainly wasn't me. I blew out, I don't know how many accounts, and I've talked about how inconsistent I was really for my first 10 years of trading. A lot of traders have blown out their accounts, but if you can focus on your process, if you can focus on your position size, if you can focus on the risk management, you don't have to put yourself in that situation. The question I have for you is, how will you handle a losing trade? A significantly losing trade? How will you handle a losing day, a significantly losing week, or a month? How will you come back as a better trader? One of the ways you're going to do that is beforehand. You've got to put yourself in the worst possible scenario before it happens. Create that fire drill in your trading. To recap, the five keys to self-confidence in trading. Number one, focus on the process, not the P&L. Number two, position size. Scale down your position size. Number three, define your risk. Number four, prepare and journal your trades. And number five, trade with rigid rules. I hope this is helpful. If you want to be part of a community of like-minded traders, just go to community.navigationtrading.com. We've got hundreds of traders interacting on a daily basis, not only about the mindset stuff, but also sharing trade ideas with the sole purpose of helping each other become better traders. I look forward to seeing you on the inside, and we'll see you in the next episode.