”Sound strategy starts with having the right goal.”
-Michel
Porter
We need to
set goals for our trading. We need them so that we can evaluate our trading and
become better traders. But what is a good goal and how do we evaluate and
measure them?
Bad Strategy Goals
It is easy
to set a monetary goal for a trading strategy. Perhaps making $10 per day or $1,000
per month. It makes sense at first. If you have expenses of $1,000 per month
why not have a goal of making at least that amount?
I did this
in the beginning of my trading career. I used to sit and think that if I made
1% per day with a starting capital of £1,000, how much would I have at the end
of they year. Then I would do the calculation in Excel and come up with a nice
little sum of £12,032 or 1,103% (assuming 250 trading days).*
Wow, what
if I could make 1.2% per day? Then I would have £19,730 or 1,873%. All very
impressive numbers but not realistic. Trading just doesn’t work like that; it
isn’t that consistent. There will be losing days, losing weeks and losing
months. Any losing streak will kill a strategy based on short term returns.
There is
nothing wrong with having a monetary target as an overall goal. A million in
five years or ten million before I am 50 are great motivators to get you out of
bed in the morning, but for strategy goals they are useless.
Good Strategy Goals
What is a
good strategy goal then? Most traders think in terms of performance instead of
result. I know what you are thinking, but no, they are not the same. Results
are monetary goals while performance goals are more of the type: risk vs
reward, minimising drawdown or volatility of the P/L (profit/loss).
Another
type of goal could be to simply improve over time. Am I better now than I were
one year ago? If not, then why? If yes, then also why? That is one of my goals.
I want to see that I am improving as a trader over time. These days it is more
or less my only goal. If I am constantly improving, then I know I will increase
my profits.
Another
good goal could be to stick to the trading plan. Sounds simple but it really
isn’t, especially in the beginning. I used to do deviate from my plan a lot as
a newbie. Then when I looked at my trades, I could see that my worst trades were
those where I had abandoned my plan just because I thought I saw something good
in the charts.
If you have
a plan that says that you should take trades when two moving average cross with
increasing volume, then those are the trades you should take, not the ones
where someone said something on Twitter.
Trading Goal for Newbies
Here are a few specific goals you can try out. You can have more than one goal as long as they are not conflicting with each other (I don’t any of these conflict). Pick a few of them and stick to them. If you find that you are not able to, then ask yourself why. Was it because the goal was too hard or because I just deviated from my plan? Perhaps the goal just wasn’t a good goal for me to have right now.
- Follow the trading plan to the letter. DO NOT TAKE TRADE THAT ISN’T IN THE PLAYBOOK!
- Have a risk to reward ratio of a minim of x to 1. It could 2 to 1, 3 to 1 or whatever, but if you see a trade with a 2 to 1 ratio and your minimum is 5 to 1, then don’t take the trade.
- To have a win rate of x% over a longer period. This depends heavily on your type of trading and you need many trades to evaluate since trading is a streaky business.
- Limit losses by setting stops and sticking to them.
- Improve over time. Make sure that your win rate, draw downs, P/L volatility and result improve over time and or number of trades. The goal is to become a better trader; to become a great trader.
There is
the old “SMART” acronym, Specific, Measurable, Attainable, Relevant and Time.
Sure, I agree with that, but not all goal can be. The goal “to become a better
trader” isn’t very specific, but very important in my book. It may or may not
be measurable (results are just one aspect of improvement).
Updating Goals
After you
have traded a while and you have a number of trades (at least 200 in my opinion),
then you can analyse that data and come up with new goals. If you see that you
make 5% per trade on average, on certain type of trade, then your goal should
be to take more of those trades.
If you see
that your drawdown was too big then your goal should be to limit drawdowns from
here on.
You and
your trading evolve over time and so should your goals. The goals that you had
as a beginner might not be as relevant after a few years of experience (but they
could still be of course).
But don’t
spend hours on goal setting. Just pick one or two and then focus on working out
a trading plan, study the markets, study the charts and trade. The best way to improve
is to just do it. Trade – evaluate – repeat. That’s the magic sauce!
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