 Welcome back to the Trade Hacker Mindset. In this episode, I want to talk to you about using a stop loss versus a stop profit. 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 using a stop loss versus a stop profit. If you've been kind of studying trading, if you've been involved in trading for any period of time, then you know and you've read and you've learned that risk management of your trades is one of the most important aspects of your trading. However, if you've been following me at Navigation Trading for any time at all, you probably know that not only do I not use stop losses, but I advocate against using a hard stop loss. So I wanna spend a few minutes and tell you why that is and really clarify when it does or does not make sense to use a stop loss and when a stop loss can actually stop you from making profits. So let's talk about this. So to start with, when I trade options spreads or if I'm trading options at all for that matter, I never use a hard stop loss. I will never, ever, ever put in a stop loss order into my brokerage that automatically takes me out at the market while I'm trading options. And the primary reason for that is A, I am watching my trades. So that has a lot to do with it, right? I'm rarely away from my computer or a phone or some type of way to be able to exit a position if I really, really need to. And so that's one. Number two with options, some options on stocks can have a little bit wider bid ask spreads than others. And so, and those can fluctuate depending on volatility, depending on how quickly the underlying stock moves, depending on a lot of different factors, those bid ask spreads can widen and they can narrow. And some of that has to do with the market makers being able to wide and narrow those spreads depending on their particular situation. And so that's just talking about specifically trading an option in general. When it comes to trading spreads, now we're talking about trading a spread that is made up of two or four different options, different legs of the spread. And so now you're talking about an even wider spread between the bid and the ask with a spread versus a single option. And the vast majority of the option spreads that I trade are not day trades. They are swing trades that I know I'm going to be in for a matter of days or a matter of weeks. And if I put in a stop-loss order into my brokerage platform and price gaps overnight, the fill that you will receive on that order when the market opens could be extremely unfavorable, okay? So now I know that's from experience because I've tried it before. And so trading any type of option spreads, I just absolutely do not use stop-losses. I do not advocate anyone use stop-losses when trading spreads. The way that you manage risk on those trades is at order entry. You manage your risk by the position size that you use. You need to get into that trade with a position size small enough so that if there's a massive move against you, it's not going to kill your trading account, okay? So that's trading option spreads and specifically swing trading option spreads and some of the main reasons why I do not use stop-losses, okay? So let's take that, let's put that aside. Now let's move to something a little bit different from a methodology and let's just talk about day trading and let's talk specifically about day trading futures or day trading stocks. So when it comes to day trading futures or stocks, this is a little bit different ballgame, right? I mean, we are setting up our parameters and hopefully you are setting very specific risk versus reward parameters. So when it comes to day trading stocks or futures, I don't have a problem with using a stop-loss. In fact, if I'm in a trade and let's say I need to go use the restroom or something, I will put in a stop-loss. If I'm gonna be sitting there in front of my computer, I typically don't have one in because I've got my finger on the mouse. It's a very quick type of a trade. So I'm in it, I'm managing it, I'm active. I am focused on that trade while I'm day trading. So I'm typically not putting in a hard stop. I'm gonna be there to manage that trade. But like I said, if I have to go do something, if somebody calls me and I have to take the call, I typically don't, I typically shut my phone off while I'm day trading. But if for some reason I have to take a specific call or I have to use a restroom or do something, I'm going to put in a stop-loss order so that in case a massive move happens while I'm away or I'm not 100% focused, then I will have that protective stop in place so I don't incur a loss bigger than what I anticipate for my specific risk for that trade. Now, having said that, remember, I'm talking about putting an actual hard stop-loss into your brokerage platform based on if price hits a certain level. So that's my way of doing it. Now, that does not mean, and this is what I wanna get very clear on, is that does not mean that I don't have a very specific exit point if price trades to a certain level, okay? Now, a lot of the day trading that I do is based a lot on price action. And so it depends on how quickly the stock moves to a certain point. Does it grind there? Does it flush to that point? Or what happens? So my parameters for closing out a losing trade, I have very specific risk management of that trade, but I'm just saying I don't typically put in an actual hard stop-loss. Let's get into a little bit more of the mental side of stop losses versus stop profits because this is where I really think that a lot of traders go wrong in how they manage their trades. One of the most frequent mistakes that I see traders make, and this is not necessarily new traders. I mean, I even find myself doing this sometimes, and that is stopping out your trade prematurely and it reduces the reward part of your risk reward metrics. Okay, so when I said stop losses versus stop profits, this is what I'm talking about. When you are in a trade and the trade is going in your favor and you exit, you stop yourself out, you get out of the trade with a small profit when it wasn't actually the profit target that you were looking for. What I find so often is that a lot of traders and it's this, when you're trading, there's fear and greed, right? Those are the two primary emotions. The majority of traders trade based on an internal fear. And that goes a couple of different ways. Number one, a lot of traders are actually pretty good at adhering to their stop loss. If they say, I'm gonna get out of this trade if it goes against me this much, they're usually pretty good at that because they have a fear of loss, right? They're scared, they don't wanna lose too much, so they will stop themselves out. I find that a lot of traders are pretty good at that. But what they're not good at is adhering to their profit targets. They are constantly stopping themselves out with a smaller profit if the trade goes in their direction than they should have or than they anticipated when they first got into the trade. And what happens is over time, these traders have trouble getting consistent profits because their winning trades end up being not much larger than their losers or the winners are smaller than the losers and from a risk rewards standpoint over time, depending on their win rate, that's not going to equal consistent profits over time. There are a few reasons that traders tend to cut their profits short. One reason is that they simply just, they fail to identify their profit target as clearly as they do their stop loss points. Okay, so that's just a real simple one. They have more of a focus on their stop loss than they do on their actual profit target. One other issue that I see is that traders have a lack of confidence in their trade idea or the trade that they put on. So it's a complete lack of confidence in the strategy or the methodology or the specific trade that they are entering. And part of this lack of confidence comes from their own emotional mindset of trading. They either don't completely understand the strategy that they're trading. They have not fully tested it to gain their own confidence in that strategy and or they just haven't stayed strict to the rules around that strategy. So one time they'll get in the trade, they'll exit at one point. They get into the next exact same setup, exact same trading strategy and they'll exit at a different point based on what they think might happen. Kind of a gut feel type of reaction once they're in a trade. So all those different types of scenarios can cause a lack of confidence in your trade idea or your trading methodology. The other thing that I see, and I think, I mean, this is one thing that I see all the time is that the strategies that I trade, I have tested, I have vetted, I have over analyzed into oblivion. And I've traded over and over and I've tested to a point that I understand the criteria needed to maximize profits over time. I don't know what's gonna happen with one individual trade, but I have a big picture perspective of that strategy and I know that if I trade that strategy with specific criteria over and over and over and have a high number of occurrences, I know that I will be successful. So I see over and over where I can trade a strategy and be super successful over the course of months or a year or a couple of years. And I see other traders trading the exact same strategy at the exact same time and getting frustrated and having losses or mediocre results. So why do you think that is? That person, I'll tell you why that is, that trader has a lack of confidence in the strategy that they're trading. If they didn't put in the time to test and vet and paper trade and back test and do all the things to make themselves confident in that strategy, they're always going to be second guessing. And that's why when you try to borrow or you try to copy somebody else's trading, it never works until you actually become very dedicated into learning that exact strategy, why we're putting it on, how to manage it, what the best way to manage is to maximize profits over time, not until you do that will you have the confidence in that trading strategy. I had an email conversation with one of our new members just the other day. They received one of our trade alerts and they emailed me. They were using a different broker than I use and they were trying to figure out how to enter the trade. And so I helped them out. I kind of walked them step by step through how to do it. But then I also said, now I really hope you're paper trading because you should not be risking any real money until you actually understand how this strategy works and all the internals because if you didn't understand just some of the basics things of which leg you sell, which leg you buy, if you don't understand that then you should not be risking real money on this trade. The response from the member was, well, if you have confidence in the trade and I just copy you, then I think I'll be all right. And that just frustrates me because I want to tell this person or I did tell this person, that's not how trading works. You can never copy somebody else's trades without understanding the strategy and be successful over the long run. You might get lucky, you might hit a couple of winners, but what happens when you hit a losing trade and you just copied somebody else's trade and you have no idea why they did that or how they manage it or all those different aspects, then it's going to create this frustration or lack of confidence. You're gonna start thinking that this strategy doesn't work because of one specific trade or a series of three different trades or whatever it is when the reality is you just need to understand the big perspective of how this strategy works over many trade occurrences and how that is going to reflect your performance over time. All right, so bringing it back, I was talking about different culprits in why people take trades off early. So there's one other and I kind of hit on this but I mentioned a lot of traders trade out of fear. A lot of traders are just risk averse and this plays a role in prematurely stopping out your profits and you've probably heard somebody say or I mean, I actually saw somebody post this in the community and I didn't respond because I was on my phone, I was too busy, I really wanted to put some thoughts together but I didn't have a chance and then I forgot to go back and do it but you've probably heard somebody say you can never go broke taking a profit, right? Have you ever heard that saying? Have you ever heard a trader say, well, you can never go broke taking a profit? Basically what that means is they just closed out their trade early, took a smaller profit than what their intended profit target was. When I saw this member post that in our community, oh, I just like my whole body tightened up and I cringed and I was like, oh no, like I really want to encourage you if you ever have that mentality when you're trading, if you have that mentality, well, if I take a profit, I can never go broke, right? I'm booking profits, so that's better than nothing. That is a mindset that will ruin your consistency of profitability over time. I want you to take that saying, take that mentality of booking a profit will never allow you to go broke. I want you to take that saying, take that mindset of whatever it is you're thinking when you say that or think that or feel that. I want you to roll it up in a ball. I want you to throw it in the trash and I want you to never ever say or speak of that again. Because when you do that, you're basically saying that you don't care if your winners are smaller than your losers. You see, as a trader, you think you're managing the trade. You think you're being smart when you do that, but the fact is you're actually managing your thoughts and feelings about that trade. You are actually undercutting your confidence by not allowing yourself to develop trust in those trades. Watching a trade actually go through time, go through all the way to its target actually requires a little bit of an unusual degree of security and the ability to kind of tolerate uncertainty. Remember in past episodes, especially when we were going through the series of Mark Douglas' topics from his book, Trading in the Zone, we talked a lot about being able to tolerate the fact of the uncertainty of the market. And that's no truer than when it comes to this topic that we're talking about right now. See, as a trade moves further in your favor, okay? Now you have more profits or paper profits that is potentially exposed to future risk. So as you sit through this trade and you let it go further and further in your direction, it actually takes more confidence as a trader. It takes more confidence to sit in a winning trade than it does to actually enter your trade to begin with. Think about a time that you had a trade on and it was well in your favor. And then all of a sudden, it started reversing and going against you and you ended up getting out of the trade and scratching the trade. Well, what happened? You probably started kicking yourself or calling yourself names. Why didn't I take profits? I was up $1,000 or I was up $1,500 or whatever it was. And now I scratched the trade for no profit. Why did you view it that way instead of viewing this reversal of the gain that you had as nothing lost? It was simply just a scratch trade. So how do you as a trader, how do you achieve this level of confidence that you need to sit through trades that are going in your favor? Well, it kind of goes back to what I was saying earlier is that your confidence actually comes from trust that you have in that strategy that you're trading. If you're married, hopefully you trust your spouse, right? You have confidence in your marriage because you trust your spouse. See, if you're in a trade and it's going in your favor, you start to have this uncertainty. Is it gonna keep going? Is it gonna come back against me? What's gonna happen? You start to have this uncertainty. The way you endure that is because you've had the experience before that that discomfort, that that anxiety, that that uncertainty is indurable and that you can gain a lot more than you lose by sticking with your planned trades. It really comes down to having a mindset that when I put on this individual trade, my job as a trader is not to make money on this trade. My job as a trader is to follow the rules that I've laid out before I entered the trade. That's the only way that you're going to build this trust and build this confidence in your trading. If you're changing your rules every time, if you're letting losers go too long, if you're taking profits too early, you are never going to gain the trust and the confidence in your trading that you need to be successful long-term. Because when you break your own rules, you're breaking your own confidence in yourself. So when you take profits early, when you use your stop profit scenario, this is actually stopping confidence in yourself as well. Every time you follow your rules and every time you do things and follow your rules, you actually start to build trust and confidence in yourself as a trader. This can happen on such a subconscious level sometimes, unless you become aware of it, that so when you take a small profit and think you did a good job by, hey, I booked profits, it can never go broke, booking profits, that kind of thing, what you've done is you've undercut yourself, you've undercut your own confidence in yourself. And so maybe it wasn't a bad thing for that one individual trade, but it's going to lead to you breaking rules in the future, which is going to continue to spiral against yourself and deteriorate the trust that you have or should have in yourself as a trader. So for some of you, one of the main things that you need to do is when you enter a trade, you need to have the rules that you're gonna, how you're going to manage that trade. You need to have that written down word for word in front of you when you enter a trade and stick to those rules and do it over and over and have the mental capacity in the mindset that you are going to follow your rules. If you have a loss on this trade, who cares? That's not what we're trying to do here. Our goal is to follow our process. Our goal is to follow our rules. Our job as a trader is not to try to make money, it's to try to follow our rules. So I hope you take this seriously because it is such a massive, massive deal when it comes to whether you're going to be successful or whether you're not. Now, I have one other thing on this topic that I want to talk about and that is kind of the flip side of what I would call an impulsive trader, right? An impulsive trader changes their rules in the midst of a trade. They cut their winners too short, they let losses go, they're impulsive. The flip side of that is another type of trader and let's just call this trader a perfectionist. I've seen traders where they'll see a A plus setup or they'll have a great trade idea based on whatever analysis they've done only to let that trade go, right? They never even participate because maybe the market didn't quite come down to the very tick of the level that they wanted to see it come down to so they're very perfectionist. When you see a setup or if you come up with a winning trading idea and then you see it work out without being on board with that trade can create extreme frustration. One time I took a tour of the Facebook headquarters and they have plastered all over their walls. Done is better than perfect. Done is better than perfect. So don't have to have everything absolutely perfect if you have a great idea. If you see a great setup, get in the trade and let the market take care of it and use probabilities. Make sure you're still following your rules and trading based on statistics and probabilities and over time those trades will work out. I hope this was helpful. If you wanna be part of a great trading community just go to community.navigationtrading.com. We have hundreds of traders interacting on a daily basis not only about the 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 I'll see you in the next episode.