All right. So, today,
we're going to talk about what is a stop
loss and also what is a profit
target and why should
you use it in your trading.
Let's get started. [MUSIC]
A few days ago,
I published a video about
losing money in stocks
and let's just jump over to the screen
here real quick because I want to show you
the video and a great comment
that I received from one of the viewers.
You can read it here where it says,
"this was really helpful
but I don't know what is stop
loss is." This is why today,
I thought we'd talk about what is a stop
loss or what is a profit target
and why should you use it in your trading.
And the challenge is, I want to explain this to you
in 4 minutes
and 20 seconds.
That is the goal, explaining these concepts
in 5 minutes
or less because as you will see,
I believe that trading can
be simple.
And I'm going to prove it to you.
So, let's jump over to the computer
again. And here,
you see a chart of Netflix
and I'm just using Netflix as an example
here. So,
let's say that right now Netflix
is trading at around $380.
You see it right here.
And let's say, you think that Netflix
will continue to go higher.
If you do this and if you buy the stock
right now for $380,
I recommend that you set a stop loss.
Now, what does it mean,
setting a stop loss?
It means that you pick a level
where you admit,
if the stock goes there,
you were wrong.
You've got let me do your losses because
think about it,
when trading there are 3
things that you need to do,
right? You need to pick the right stock.
You need to know when to enter
and let's say that you identify this as
a good entry, and then you need to know
when to exit.
And when it comes to exit,
you need to know when to exit
with a loss
and when to exit
with a profit.
So, let's say right here,
you're entering at 380
and think, of course,
that is the idea that Netflix goes
higher.
You set your stop loss at 360
means that if Netflix turns
around and goes to 360,
you get out. You were Wrong.
In this case,
you picked a level where you admit
it, "I'm wrong.
I'm moving on
and I'm keeping my losses small."
Now on the other hand,
what is the profit target
up here?
A profit target means that if
it goes there,
you're taking money off the table,
and you might pick a value of
420
and believe if Netflix
goes up there, you're taking money
off the table. Now,
let's take a look at what happened here
to Netflix after you've entered.
Look at this, it keeps going down.
Now, this means they are getting stopped
out. Means that you are realizing a loss
but it is a small loss.
If you are trading one share,
we are only talking about $20.
And look at this.
If you don't get out
with a small loss,
this small loss could
quickly turn into a larger
loss. Look at this.
Netflix keeps going down,
down, down,
down, all the way down actually
to 290.
So, the idea here is risk
a little. And then if you're
right, make more on your winning
trades than you lose on your losing trades.
And that's an important concept that I want to just
quickly write down here.
So,
this is where I like
to use the 'golden
rule' and what does this mean?
What does the golden rule mean?
The golden rule means that you
risk a $100
trying to make
$200 or in our specific example
here for Netflix,
that you're risking $20
trying to make
$40.
Because here's the cool thing,
if you keep your losses small,
and make more money on your winning trades
than you risk on your losing trades,
you can make money,
even if you're wrong half of
the time. So, this is why
we want to have the golden rule.
And if you would enter
Netflix and buy it at 380,
you risk $20 trying
to make $40.
Of course, if you're trading multiple shares,
this would be multiplied.
Let's see, how are we doing
on our time?
Perfect. 30 seconds left
on the clock. So,
in summary,
always a limit
your risks
and you do this by using
a stop loss.
A stop loss means that you are getting
out of the trade if it moves
against you, if you are wrong.
And a profit target means that you're
taking profits off the table,
if the trade moves in the right
direction.
And these are the important 3 things that
you need when trading.
Find the right stock to trade.
Know when to enter
and also know when to exit.
Know when to exit
with a profit
and know when to exit
with a loss. If you would like to know more,
then join us at one of our upcoming
bootcamps at bootcamp.rockwelltrading.com
and this is where we explain everything
in more detail.
This wraps up today's video about
what is a stop loss.
What is profit target
and why you should use it in your trading.
I'll talk to you very soon.
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and leave a comment
and let me know what you think.
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