Stop losses are extremely misleading and they are also manipulated at our expense. if you think that formal stop loss is the ones that you set in your platform, if you think that those are protecting your capital, you are most likely being scammed. So the goal of this video is to explain to you why setting formal stop losses is almost always a bad idea and of course what you should do instead. And as always in return for this video, the only thing that I ask the only thing that I ask is that you get that beautiful like button and also subscribe if you see value in the following video.

Ok, so in order for you to understand how this works, let's go ahead and start from the bottom. So as you know, a stop loss is something that you set that automatically sells you out of your position. If the share goes below a certain amount, a lot of folks will locate a support line and set it to sell out at that level of support so that in the event that it breaks that level, their shares are automatically sold. This gives them peace of mind because they know that their shares will automatically sell at that point.

But the first thing that a lot of new traders don't realize and there are a few ways around this. but the thing that people don't realize is that the stop loss function really doesn't just sell you out at that position. This function really just creates a market order once the price reaches the stop loss level. So say I set a stop loss for Tesla to sell out at long-term support, say at 2:47 Once it goes below 247.

the stop loss automatically triggers a market order, and the market order then sells you shares at whatever the market price is at currently. So it's almost as if you had just set a market order yourself at that specific point. This means that if a price drop triggers the stop loss, it will turn into a market order and attempt to sell it regardless of what the next market price is. So if it's dropping, you're going to lose money.

But that means when a price is dropping rapidly, it's likely you'll sell out a decent amount lower than where you set your stop loss in the first place. But if you've ever used a stop loss before, you probably already know this. This is sort of stop-lossed 101. What you probably don't know is that when you set up a stop loss, market movers get to see the level at which you set it at, and more importantly, they could see the level at which all of the other folks said it at when people set their stop loss at a specific point that everybody else normally uses, such as the support line.

That means the market makers know that if the price goes there, a lot of sell orders will be triggered. So with this in mind, market movers developed automatic trading algorithms that use computerized statistical formulas that will temporarily force these share price down in order to trigger these stop losses. This is a completely legal manipulation and is a perk of being a market maker in a volatile market. This means that we are not only losing the opportunity of the position itself, but we are also playing right into the market makers hands.

In other words, the tool that many people think protect us is actually used to our demise. Market makers know that people trade and people use certain support levels and they look for it and then they figure out how they can use their computer algorithm to buy you out or sell you out of the position so that they can make it profit off you. If you watch minute by minute price action of a Momentum Play, any momentum play, you can often see the share price rapidly decreasing all of a sudden and then Boom. It was like it never happened and the stock price continues rallying well.

if you set a stop loss at a popular level of support on that momentum play, then your stop-loss probably got triggered and you just got kicked in the face by a market maker. So no ignorance really isn't bliss with this. This is why you shouldn't use formal stop losses anyway. So by this point I've explained how formal stop losses the ones that you see in your platform not only don't guarantee that your shares will sell at the point that you set them at, but they are also actively manipulated to make you sell out of your positions, even if that position would have made you money.

So with this in mind, my opinion is that setting a formal stop-loss is almost always a bad idea. Now you could make an argument to set your stop loss at an unpopular support level such as maybe five cents below support or two cents over it. But personally, I'm of the opinion that avoided me formal stop loss altogether is probably your best bet, but protecting yourself is of course still a necessity. So let's talk about an alternative.

So instead of trusting a computer algorithm to cut your losses for you, take it upon yourself to do so. We're going to be talking about how to set a mental stop-loss A mental stop-loss is basically the same thing as a regular stop-loss except that you get to control it. The upside is the same is the downside, and again, that's you get to control it. Of course, if you're very undisciplined, this is horrible.

The difference though is that in the first scenario where he set a formal stop-loss you're setting a mechanical point at which the computer should sell you out. But what the mental stop-lossed You're cutting your losses intelligently. The reason that we as traders can profit when we are competing against computer algorithms and other traders is because of the fact that we don't have a set point That we, sell out, Rather, we sell out after analyzing the situation. It's really easy for algorithms to be programmed to sell out mechanically at a 5% loss, but it's much harder for it to analyze the emotional reaction of the masses and its effect on the share price.

And that's where we come in because we can do just that. Thus, we can take advantage of this by cutting our losses intelligently by setting a mental stop-loss So the first step to setting a mental stop-loss is analyzing the situation and figuring out exactly what level or what price point you're going to want to sell out at. Okay, so say we're looking at the intraday chart on Tesla and say we're over here at 280 and we're like, ok, well, you know I'm gonna declare support at T 70 for 0.5 So instead of saying that, oh, I'm gonna set a formal stop-loss here to automatically sell out of my position. What I'm going to do instead is I'm going to sell I'm going to set a price alert.

So I'm gonna create an alert for it to alert me when it hits two seventy four point five. Since we're setting an alert instead of a stop-loss it might be useful to set it a little bit closer or a little bit farther away. A might be useful to set it a little bit farther away and that way when it hits 275, it triggers our alert and we're alerted that now we should go and analyze the situation. The reason that it shouldn't be so close to the actual support line is the fact that is the fact that we might not have the time to analyze the situation.

This is sort of like a clean-cut example of how we can have enough time to analyze it. If it's dropping really fast, you might still not be able to analyze it. I Think this is one of the best ways to do it because it allows you to open it up and handle eyes the situation and figure out where you're going to cut your losses. your decision on where to cut losses though it's not foofy each and just say oh, I don't feel like cutting here.

Instead it's like okay, well look we have it's two, seventy four point five. So in this situation, what I do is like this is the bottom support for the day. So I'd open it up and look at the next time frame and I'd say okay, Well, T 75 s right here. but the downward potential from the last five days goes all the way down to 254, right? So that means that there's a lot of downward potential.

So I'd say to myself, okay, there's not much upward potential. It's not that there's a lot more downward potential almost near overbought on the Horace I So that's an issue. So in this situation, if it hit 275, I would do this analysis and then I'd say okay, I'm gonna trigger my mental stop-loss and I'm going to sell out here. If you're less conservative, you might say to yourself, okay, well let's look at the longer-term chart.

Okay, well, we do see that we had a lower, so 254 was about the bottom and that's when we started seeing this upward reversal and then you could say to yourself, okay, well, maybe instead of setting a stop-loss I'll say that when it breaks this level right here, when this breaks back down below here, then I'll sell out because that's the break of resistance and all the resistance becomes new support. But but my point here is that no matter what strategy you're setting, don't just set a blanket number Oh 5% down, 10% down. This is something that I did when I started training and I found that it just doesn't really allow you to cut losses intelligently. It's the only real competitive edge that we have against computer algorithms and other traders is just our understanding of how emotions work and how other traders buy in.

It's really important to cut your losses intelligently instead of just making a blanket cut at 5% down. Now I've even made a stoploss video on how to set a hard stop loss or a formal stop loss, but I Just think that it's horrible advice to say that you should set a blanket stop-loss that the market makers can see and the market makers can take advantage of you. And also if it's going down really rapidly, then you're probably not even going to get out of that position. So if the whole thing was a farce anyways.

But in any case, if you get alerted with this position, then you can go and analyze it and figure out exactly what you should do at that point and what point you feel comfortable. But in any case, before you even enter the position, you had a plan. You had already analyzed the situation. But at this price point, that's when you're telling yourself, oh, okay, well something's changed.

There's it hasn't gone according to plan, the stock isn't doing what I want? Do I sell out here? or do I not sell out here And the answer to that question comes from your risk tolerance level and the amount of upward versus downward potential. And it also comes from price strength just because it hits it for a second. if it dips below the SMA line all of a sudden, but then goes back up immediately, you don't want it to sell out if you set a formal stop-loss Going to miss out on that opportunity if the market maker decides to bring down the share price to trigger stop losses. this is your best way to protect against that, because now you can not only see that, but now you can take advantage of it by buying more and averaging down.

And honestly, that's a really great method. Of course, you're still gonna want that conformation. What's that break above the SMA line? that first candlestick that we look for? You always want to get a conformation, but it's at the end of the day. You want to make sure that you have some sort of back-up plan and it's so important to plan with these.

But in any case, the other thing is that when you're setting a price target, this is about the level that you would set. If you're going to put a stop loss, it's the mechanical level that you would otherwise put your hard stop loss in. So when you're making your exit plan before even entering the position, instead of actually making a stop loss, you are identifying a level of support at which you would normally put that stop-loss now it's not automatically 5% down, 20 cents down, whatever and said it's an actual level of support. This level is based on your risk tolerance and the type of position that you were holding.

But anyways, you've identified your level of support. so you set a price alert near that position. And if support is really low, that means that means that you have a lot more downward potential and you might want to rethink your position anyways. So anyways, once you've identified your level of support, you set a price alert near near that point.

You don't want to be too close because you need to reanalyze the price action. It cut losses intelligently intelligently instead of just mechanically. And then if you do get that alert, you are reanalyzing the price action. You are looking at the upward and downward potential and you are analyzing for price weakness or strength.

If you see price weakness once we cross below the mental stop-loss line, then it's time to sell. If you see price strength, then we need to adjust accordingly because we aren't just cutting losses mechanically or blindly. Rather, we are cutting them intelligently and we don't want to sell out if we see price strength now. These support and resistance lines are adjustable based on your time span and based on me of risk tolerance that you're taken into any given position.

And I have many other videos that discuss how to identify levels of support resistance. In any case, I Hope this video was valuable for you. If you would like to connect with me and other zip traders, you can go ahead and join our zip trader circle. the link is in the description.

it's also pin to the top comment. We post nightly watch lists and there's honestly a lot of value that doesn't really come from me, but comes from the other people on the group anyways. Have a great day folks and I'll see you in the next video.