 Welcome back to the Trade Hacker Mindset. In this episode, we're going to talk about learning to trade an edge like a casino. And I'm going to give you a very specific exercise that I promise will help you become a better trader. 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 our discussion of learning to trade an edge like a casino. I'm going to share an exercise with you that's going to help convince you that trading is really just a simple game of probabilities. It's nothing but math. As we've talked about in previous episodes, on the micro level, the outcomes of the individual edges are independent occurrences. And are random in relationship to one another in the big picture. At the macro level, the outcomes over a series of trades will produce consistent results. So from a probabilities perspective, this means that instead of being the person playing the slot machine in a casino as a trader, you can actually be the casino. So to do this, you have to have three things. Number one, you have to have an edge that genuinely puts the odds of success in your favor. OK, so I'm not going to talk about a specific strategy or a specific edge. These are all things that we teach in our classes at navigation trading. Number two, you can think about trading in the appropriate manner. Remember, remember, we've talked about the five fundamental truths. So you have to be able to apply those fundamental truths to your trading strategy. And number three, you can do everything you need to do over a series of trades, over a number of occurrences, then like the casino, you will own the game and be a consistent winner. OK, so let's get started setting up this exercise. Now, I truly hope that you actually follow through with this exercise because I promise you it will help you start to be able to think in probabilities and it will help you become a better trader. I promise you, I really can't emphasize enough. How much I hope you actually follow through step by step with this exercise. It's going to take some effort. It's going to take some time. It's going to take a little bit of planning. But if you will follow through on this exercise, you will be amazed at what it will do for your mindset around trading. So the first thing you have to do for this exercise is pick a market. Choose a market that you're going to trade for this specific exercise. Now, at navigation trading, 90 percent of what we trade is options. For this specific exercise, I want to do it a little bit differently because there are some variables with options that don't necessarily fit into creating this exercise in the most clean, efficient way possible. So for this specific exercise, I want you to pick either one actively traded stock or a futures contract. It doesn't matter what you choose. If you want to choose SPY, which is the S&P 500, or if you want to choose Apple, or if you want to choose S&P futures or Euro futures or oil or natural gas or whatever it is, just make sure we're focusing on one market. Pick your market for this specific exercise. As long as the market you choose is liquid and it fits within your margin requirements, that's all that you need to do. Actually, one more thing you want to be able to trade for this exercise. You want to be able to trade this market that you choose in increments of three. So if you choose a stock, you want to be able to trade like 300 shares or you don't even have to do that many shares. Let's say it's 30 shares. That way you're doing it in increments of three. Or if you're trading a futures contract, make sure that you can trade at least three contracts. Next, I want you to choose a set of market variables that you think define an edge. OK, so if you have a very specific trading system that could be traded with this exercise, feel free to use that. The trading system or methodology that you choose, it can be mathematical, mechanical, visual, based on price chart patterns. It doesn't matter whether you personally have this system or if we just follow an example that I'll show you here shortly. This exercise is not about the system development. It's not about a test of your analytical abilities. In fact, the variables that you choose could even be considered mediocre by most trader's standards, because what you're going to learn from doing this exercise is not dependent upon whether you actually make or lose money, even if you break even or or lose a little bit of money on this educational exercise. I promise it's going to cut down on the amount of time and effort that you might otherwise spend trying to find the most profitable edges. Depending on where you are in your journey as a trader, I know for me, I mean, I was on a journey for about 10 years before I found consistency where I was trying different systems, losing money, trying different indicators, losing money, following different gurus, losing money. And so it's a very costly thing. I promise you, even if you lose a little bit of money, which I'm going to show you how it's going to be very difficult to do, this education, this cost of this education from this exercise will far outweigh any of those things that I just described. Whatever system it is that you choose or whatever criteria that it is that you use, just make sure that it follows the following criteria. Number one, on the trade entry, the very whatever variables you use to define your edge have to be absolutely precise. The methodology that you use, it has to be designed so that it does not require to you to make any subjective decisions or judgments about whether the criteria is present or not. It has to be absolute, meaning if the market is aligned in a way that conforms to your very rigid variables of your specific system or methodology that you'll be trading for this exercise, then you have a trade. If not, then you don't have a trade, period. No other outside random factors can enter into the equation. Next, the stop loss or exit, the same conditions apply to getting out of a trade that's not working. There you have to have very specific criteria for when you get into the trade and you have to have very specific criteria for when you will exit the trade. And this criteria has to tell you exactly how much you need to risk to find out if the trade is going to work or not. Now, this doesn't mean you have to have a specific dollar amount that you're going to risk on a trade and put that stop loss at a specific dollar amount. You could use the overall structure of the market, depending on what your criteria is for entry to determine where that where that exit point is. But the bottom line is you have to have a very specific exit, loss, bail criteria, and you have to know the exact amount of risk that you'll take on that trade. Next, you've got to select a time frame. So your trading methodology, it can be in any time frame that you want, but your entry and exit signals have to be in the same time frame. So, for example, some people will trade off of a five, a 30 minute, four hour and a daily chart. And they're using all these different time frames to help determine entries and exits. For this exercise, you can look at other things to help determine an entry criteria, but all your entries and exits have to be based on the same time frame. So I don't care if you use a five minute chart, a 30 minute chart, four hour, one day, whatever it is, just make sure that you are very specific about what that time frame is and you use that for both entry and exit. Next, taking profits. So one of the most important skills that you need to learn to be a consistently successful trader is learning to take profits. I think a lot of times as traders, we all have in certain situations, we have FOMO, right? Fear of missing out. We kind of beat ourselves up for leaving money on the table because we took profits too quickly. OK, you've got to you've got to get that out of your mind. It's actually a good thing to take money, let the market pay you as it goes in your direction. Remember, if you're going to establish a belief in yourself that you're a consistent winning trader, then you have to create experiences that correspond with that belief because the object of the belief is winning consistently. So how you take profits in a winning trade is very, very important. This is the only part of the exercise in which you'll have some degree of discretion about what you do. So remember, I talked about trading in increments of three, either you're trading, you know, 30 shares of stock or 300 shares of stock or three futures contracts. You're going to have a little bit of discretion as far as when you take that first profit, but that's that's really the only discretionary part of this exercise. So the underlying premise is that in a winning trade, you never know how far the market's going to go in your direction. Markets rarely go straight up and they rarely go straight down. Typically, markets go up. They retrace some portion of the upward move or go down and then retrace some portion of the downward move. And these ups and downs can make it very difficult to stay in a winning trade. So if you never know how far the market's going to go in your direction, then when and how do you take profits? So the question of when, you know, this is partly a function of your ability to read the market and pick the most likely spot for it to stop. Now, in an absence of an ability to do this objectively, the best course of action from a psychological perspective is to divide your position into thirds or quarters. So I mentioned I mentioned third, so you could buy 300 shares of stock or three options, you could also do it in fourth. When I'm when I'm trading, when I'm day trading specifically, I do both. Sometimes I buy an increments of three. Sometimes I buy an increments of four. For this specific exercise, let's use three or just be specific about what you'll use and don't don't vary that from trade to trade. And what you're going to do is you're going to scale out of the position as the market moves in your favor. You know, one thing I've found specifically for shorter term trading for day trading that we do, we stream live in front of our community each morning for the first 90 minutes. And, you know, it would be great if you knew exactly how far the market would move in your direction. But we know that that that that doesn't exist, right? And so what we found is that if we got into a trade and we and it started to go in our direction, there is a very good chance that it's going to go a specific level. So, you know, when we're trading options, typically we're taking profits at around 10 to 15 percent profit. Once the once our profit gets to about 10 to 15 percent, we're closing out half the trade or we're closing out a third of the trade. Because what we noticed is that we rarely took a loser on a trade without it going that far in our favor, at least for a short period of time. And on average, only about one in every 10 trades was an immediate loser that never went in our direction at all. Another 25 to 30 percent of the trades that ultimately ended up being losing trades actually went in our direction by a small amount before reversing and creating a losing situation. So if you can get in the habit of taking at least a third of your position off, take a third off or take half of the position off, every time the market gives you a move in your direction by a small amount, at the end of the year, the accumulated winnings, that's going to go a long way towards paying your expenses, generating revenue, paying for commissions and everything else that goes along with trading. So with this type of trading, without reservation or hesitation, we always take off a portion of our winning position whenever the market gives us a little bit to take. Now, how much that is, it obviously depends on the market you're trading. It's going to be different for a stock, it's going to be different for a future, it's going to be different for an options contract. So depending on whatever you're trading, the amount that you use to take a little bit off as it goes in your direction initially, is going to be a little bit different in each case. Now for trading options, I never use stop losses. I never put in hard stops. If you're trading stocks or if you're trading futures for this exercise, then using a stop could be a good thing, specifically for this exercise. Whether you choose to use them in your real methodology or your real trading, that's beside the point. But what I would say is one of the things that you can do, specifically with this strategy, just to go through this exercise, is when the market moves a certain amount in your direction, you take off a third. Let's use a number divisible by three. So you take off a third, then you have a target for your second third that you take off. And as soon as price hits that second third, you move your stop to break even. So then at that point, you're creating a risk-free opportunity for the last third. So think about how that will affect you mentally if you're able to take a little bit of profit as it moves in your favor. Then as soon as it hits your target for your second third to take off, you move your stop up to break even. Now you have a completely risk-free opportunity. Think about from a mental standpoint, how you're going to feel when you have a position on that you know is risk-free. The only thing that can happen from this point on in the trade is that you make money. It's a pretty powerful, it's a very empowering mental exercise that once you kind of get to that point, you're really going to feel something different than you did when you still knew that you had risk on a trade. It's going to put you in a relaxed. It's going to put you in this carefree state of mind. You might even get up from your computer and go to use the restroom instead of sitting there staring at your screen if you know you have this risk-free component left on your trade. So think about this. Imagine that you are in a winning trade and the market makes a fairly significant move in your direction, but you don't take any profits because you think it's going to keep going even further. However, instead of going further, the market trades all the way back to are very close to your original entry point. So what do you do now? You panic and as a result, you close out the trade because you don't want to let what was once a winning trade turn into a loser. But as Murphy's law would have it, as soon as you get out of the trade, the market bounces right back into what would have been a winning trade. If you had just locked in some profits by scaling out and put yourself in that risk-free opportunity situation, it's very unlikely that you would have panicked or felt any stress or anxiety in that specific situation. Remember, we're not trying to squeeze every last tick out of a trade. We are never going to catch the exact bottom and we're never going to catch the exact top. We are just trying to take that meat out of the middle. All right, so one other factor you need to take into consideration is your risk-to-reward ratio. The risk-to-reward ratio is the dollar value of how much you'll risk that you'll have to take relative to the profit potential. For this exercise, let's try to get to a risk-to-reward ratio that is at least three-to-one. So this means that you are only risking $1 for every $3 of profit potential. So if you have a three-to-one risk-reward ratio, this means that your winning trade percentage can actually be less than 50% and you can still make money consistently. So whether you use a risk-reward ratio in your own trading, let's, for this specific exercise, I want you to try to get to around a three-to-one risk-reward ratio. Now remember, if we're using a stop-loss and we're using profit targets, that doesn't mean your first profit target has to be three times the amount as your, as your lot. It means your ultimate profit target has to be three times as large as your risk. Okay, next topic of the exercise is trading in sample sizes. The typical trader practically lives or dies emotionally on the results of the most recent trade and that's why the typical trader is not successful. Think about this in your own trading. If your last trade was a winner, you'll gladly go on to the next trade but if it was a loser, you'll start questioning the viability of your edge or your methodology. To figure out what variables in your trading actually work, how well they work, and what doesn't work, we need a very systematic approach and one that doesn't take any random variables into consideration. So this means that we have to expand our definition of success or failure from the limited trade-by-trade perspective of the normal mediocre trader and expand that to a sample size of 20 trades or more. Okay, so any edge you decide on will be based on some limited number of market variables or relationships between those variables that measure the market's potential to move either up or down. Remember, market dynamics can change over time. There are some periods where volatility is extreme or you're having these huge swings in the market so a specific trading methodology is going to work one way in that environment but if volatility dries up and it shrinks down into these very minute ranges in the market your methodology is going to perform differently. So we have to look at not just a snapshot, not just one or two trades, it's important to look at your trades in sample sizes and 20 is a good number. You know, I track all of my trades and post them on a daily basis and I have them compiled into a spreadsheet so I can see from a sample size perspective here's how my trading did this week, here's how it did this month, here's how it did this year and you can pick up extremely valuable information from that data. For example, there are certain periods of time where I want to take my profits quicker and there are certain periods of time where I want to wait a little while before I start taking profits or I want to let my runners run longer or I want to cut my losses quicker or give my trades a little bit more room to work. So all of these things come into play with different market dynamics so analyzing your methodology, analyzing your system, analyzing your trading strategy in sample sizes can be extremely valuable and your sample size has to be large enough to give your variables a fair and adequate test but at the same time small enough so that if the effectiveness diminishes you can detect it before you lose a bunch of money. So I think 20 trades really fits the bill as far as both of these requirements. All right, so the testing phase. Once you've decided on a set of variables that confirm these specifications, you need to test them to see how well they work. Right now the bottom line performance of this system or this exercise is not very important but what is important is that you have a good idea of what you can expect in the way of a win-loss ratio. So the percentage of winners versus the losers. Remember in several of the past episodes we've talked about part of becoming a successful trader, part of having the trade hacker mindset, part of thinking and probabilities is that you are actually accepting the risk. And a requirement of this exercise is that you know in advance exactly what your risk is on each trade. Now as we know, knowing the risk and accepting the risk are two completely different things. So when you're setting this specific exercise up for yourself, you've got to be completely comfortable with the dollar value of the risk that you're taking on each trade for this exercise. Because remember this exercise requires that you use a 20 trade sample size. The absolute worst of worst case scenario is that you lose on all 20 trades. Now that's obviously a very highly, highly unlikely thing. But it's just as likely of an occurrence that you'll win on all 20 trades. So neither is very likely, right? Nevertheless, it is a possibility. So you have to set up the exercise in such a way that you can accept the risk in a dollar value of losing all 20 trades. So for example, let's say you want to trade the E-mini S&P 500. And so let's say that your edge or your system that you've set up requires that you might have to risk three full points on the S&P 500 to see if your trade is going to work. So that's your risk. That's where you set your stop loss. So three points in the S&P 500. For every point the S&P moves, it's $50. So three points would be $150. If you're using three contracts, that's a total risk per trade of $450. And the accumulated risk for 20 trades is $9,000. Okay, so if you're not comfortable with that, then maybe you could use the micro S&P contract, which is one-tenth of the size. So the risk per trade is $45. Or if you lose all 20 trades, max loss, the total risk that you took was $900 for all 20 trades. Okay, so that's a much more reasonable expectation or that's a much more reasonable amount. But whatever it is that you do, depending on your account size, maybe you do have a larger account. And so the fact that you potentially could risk $9,000 over 20 trades is not that big of a deal. But if you're just doing this, as you're just starting out, if you have a smaller account, you can always use the micros to really reduce that risk just to complete this exercise. What I would say, one thing I really want to emphasize is, don't do this exercise in a paper trading account. Okay, I know there's no risk if you're just paper trading, but you don't have the emotional attachment either. Reduce the value, reduce the risk of using a real trading vehicle, of actually putting real money into this exercise. It's going to make a huge difference in how you actually follow through and get a good feel for the emotional attachment as you're placing these trades. You know, you can get pretty much as small as you want. I mean, so I was giving you an example of an S&P futures contract. Maybe you don't trade futures. Maybe you don't quite understand them yet. Maybe you don't have futures permissions in your broker. You can do the same thing if you're trading stocks. Just keep reducing the number of shares per trade until you get to a point where you're comfortable with the total accumulated risk for all 20 trades. All right, so doing the exercise. When you have a set of variables that conforms to these specifications that you described, you know exactly what each trade is going to cost to find out if it's going to work. You have a plan for taking profits and you know what you can expect as a win-loss ratio for your sample size. Then you're ready to begin this exercise. It's very important not to skip a step and just kind of do this off the cuff and see what happens. Do a little bit of planning up front. Write it down specific to what you're going to do and follow through for all 20 trades. Trade it as exact as you can exactly how you've designed it. So this means that you have to commit yourself to trading at least the next 20 occurrences of this edge, of this methodology. Okay, don't just take one trade. Don't take a couple trades, but take all 20 no matter what and write down the results. And very important, do not deviate. Do not be influenced. Do not use any outside variables to filter these trades that have not already been part of the original system. In other words, don't start reading something and say, well, based on this information that might happen based on this potential news, I'm not going to take this specific setup. Or, you know, don't use any outside factors, set the criteria, place all 20 trades. By setting up the exercise with these very rigid variables that define your edge have relatively fixed odds and a commitment to take every trade in your sample size, basically what you're doing is you are creating a trading environment that duplicates how a casino operates. Think about how casinos make consistent money on an event that has a random outcome. It's because they know that over a series of bets, over a series of events, the odds are in their favor. But they also know that to realize the benefits of these favorable odds, they have to participate in every single event. They can't say, no, you're not taking a bet at this time. No, you're not taking a bet at this time. They have to let the gamblers bet and participate in every single event, right? You know, unless the gamblers just absolutely inebriated and can't stand up and they have to ban them from the table or make them sit out for a few hands or whatever it is, you know, the casino can't come by and say, nope, you got to hold out of this blackjack hand. You can't spin this roulette wheel. You can't roll the dice here, blah, blah, blah. You have to participate in every event. And the casino's not trying to predict in advance the outcome of each of these individual events either. As we've talked about, these five fundamental truths of trading is the foundation of understanding that trading is just a probability game. And if you internalize that, then this exercise is going to be effortless. And it's going to be effortless because your desire to follow through with a commitment to take every trade in your sample size and your belief in this probabilistic nature of trading will be in complete harmony, right? They'll be in, you won't be butting heads with this idea. And as a result, there will be no fear. There'll be no resistance or distracting thoughts. Now, there's a good chance that a lot of you are going to create resistance in your mind when you start this exercise. There is going to be a desire to think objectively. And you're going to have conflicting desires when you go to start this exercise. Let me promise you this, the amount of difficulty that you have in doing this exercise will be in direct proportion to the degree in which these conflicts exist. So don't be surprised if you find yourself on the first couple of attempts at doing this exercise that it's very difficult, that you don't follow through, that you take a couple trades and then you scrap it because emotionally or mentally, your desires are just overpowering because you're not used to this effortless, probabilistic way of trading. You still think that your emotion or your knowledge or your reading of the news or whatever it is that interferes with the variables that you have for your trading system, it's going to be very difficult for you to follow through this. And that's why I want you to scale it down to a size where you're still using real money, but you're comfortable with the risk so that you actually do follow through. Your first couple of attempts might be difficult. Push through. Finish all 20 trades and I promise when you get to the end, it's going to be a very eye-opening experience. It's going to create a self-awareness about yourself that you may not have seen in the past. I first read Trading in the Zone by Mark Douglas over 20 years ago. And I've probably read the book at least once a year since then and I've probably done this exercise 20 different times. So this idea of these conflicting desires, this is not just me saying this is going to happen to you. I'm speaking to you from experience because it's not easy to do. It's not easy to follow through on, but that's why I'm so adamant about you doing it is because I know that the ultimate outcome after you do complete and you actually follow through on this exercise is going to be very empowering for you and help you in your trading going forward. So a couple of ways to handle the conflicts that you're going to experience. Number one, focus on your objectives. Your main objective for this exercise is to finish it. It's not to determine whether your system is profitable or unprofitable. It is specifically to finish the exercise. That's it. Number two, write down these fundamental truths. Write down the principles of consistency that we've talked about in previous episodes. Write them down. Keep them by your computer every day to remind yourself that this is the goal of this is to learn to trade and probabilities. Keep it in the forefront of your mind. You've heard the term out of sight, out of mind. Keep it in front of you so that it doesn't get out of mind. And lastly, practice with conviction. This is a... Think about if you've ever exercised or if you've ever lifted weights, trying to get stronger, you're not going to... The first time you go into the gym, it's going to be very uncomfortable. You're going to be sore, you're going to be weak, you're going to look around and see other people pushing up some weight that you're like, man, I wish I could get to that kind of thing. But it's never going to happen unless you practice. It's the same thing with trading. It's the same thing with trying to think in probabilities. This is an exercise. It's very similar to physical exercise. You have to keep doing it to get into the right mindset that you need to have to be a successful trader. If you're not willing to put in the effort to go through this exercise and to do it again and to practice and do it again and to continue to push through and continue to put in the effort to become a better trader, you're never going to get there. Just like with physical exercise, if you're not willing to put in the effort of working out for 30 minutes or 60 minutes a day, you're never going to get in better shape. There's no shortcuts here. There's no magic pill that's going to make you a better trader. There's no magic indicator. There's no magic guru that's going to make you a better trader. It all has to come from you. And my final thought on this exercise is try not to prejudge how long it's going to take before you get through at least one sample size of trades. Understand that you are going to possibly, probably deviate from your plan. You're going to have distracting thoughts. You're going to have hesitation to act. You're going to deviate in some way. If you do that, start over. The exercise can take as long as it takes. So don't beat yourself up if you keep deviating. Just start over and do it again. In his book, Mark Douglas talks about using a golfer as an analogy. I mean, if you were trying to be a professional golfer, it would not be unusual for you to dedicate yourself to hitting 10,000 or more golf balls until the precise combinations of muscle movements in your swing were so ingrained in your mind, so ingrained in your muscle memory that you no longer have to think about it consciously. If you truly want to be a professional golfer, you have to put in the reps. If you truly want to be a professional trader, if you truly want to be a consistently profitable trader, you have to put in the reps. And once you acquire the appropriate skills, you really won't need luck anymore. So many new traders or even traded people who've been trading for a while, you know, they say things like, boy, I hope I get lucky on this trade, or they're just playing on hope and they're not using probabilistic strategies and very rigid systems to make their trades and that's where they lack. So I really hope you follow through on this. I really hope this was helpful. If you guys have any questions, let me know. Hit me up in the trade hacker community. If you just go to community.navigationtrading.com, we have hundreds of traders interacting on a daily basis, not only about this mindset stuff, but 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.