Sunday, April 19, 2015

Make your goals process related

A lot of traders talk about having written goals they work towards, and in the main this is good advice. One thing I would avoid however is making these goals financially based, or to give them a specific time limit.

One thing traders have to accept is that you cannot force the market into anything. If you are utilising a trading approach that has a positive expectancy, then you can only take what the markets are prepared to give. There will be periods where your approach works better than others. You have to accept that.

I've come across people who have said to me "So, if I do all this, I can make 100% a year, right?". The simple answer is that, while it is possible to make 100% in a good year, in other years you will struggle to get close to that target, or you may even end up making a loss in that year. Go look at these performance statistics from long-time traders, or my own here to see that your results can fluctuate, and you can easily swing from a winning to a losing phase in a short period of time. 

Depending on the timeframe you trade, some losing phases can last several months or even longer. As long as you are trading in accordance with your plan, and making good decisions, while keeping your risk management and your mindset under control, then you are still trading well.

The problem is that a lot of people don't think of their trading in this manner - they automatically assume that losing trades are bad trades or decisions. Consider the words of Larry Hite:

"There are really four kinds of trades or bets: good bets, bad debts, winning bets and losing bets. Most people think that a a losing trade was a bad bet. That is absolutely wrong. You can lose money even on a good bet. If the odds on a bet are 50/50 and the payoff is $2 versus a $1 risk, then that is a good bet even if you lose. The important point is that if you do enough of those trades or bets, eventually you have to come out ahead."

Therefore, it is far more beneficial to make your goals process related, and this is where keeping a diary or journal can help you. All of the following can make good goals to aim for:
  • Improve the quality of the setups you are trading;
  • Improve your trading efficiency - this may mean reducing the number of trading errors you make, improving my risk management, avoiding 'fat finger' errors, or avoiding missing out on taking trades you identified as 'good bets';
  • Eliminate any overriding of your trading rules;
  • Decide you will dedicate x hours per week to improving yourself as a trader (this may relate to work on your mindset, by maybe taking up yoga or meditation, working on your method of identifying entries - anything to help you improve);
  • Review your performance (both in terms of trading metrics, as well as psychologically and emotionally) on a regular basis, and put plans in place to correct any issues identified;
  • Keep track of the number of days where you are fully prepared, with specific potential trades ready and calculated (such as entry prices, initial stop placement, position size etc.), and that you are ready at your desk when the market opens.
One guy that I mentor has been going through this process since late last year, particularly that last element (I talked about it here). Since committing to that, and identifying the other issues he needed to sort out, his equity has jumped almost 60%. But he has been focusing solely on the process of trading, and not letting financially-driven demands or goals dominate his thinking. It is highly likely that, had he focused on the monetary side, he would still not have sorted out the foundations of his trading, and therefore not made those returns.

By making your goals process related, your goal is to ensure that you are functioning more efficiently as a trader, with fewer errors or mistakes creeping in. Ideally you want to eliminate them as far as possible.

Think of it as making sure that the foundations of a house are built properly, before you think about the walls and roof.

Sure, as Larry Hite said, even when you have all that in place, and you have a solid process, are working on improving yourself as a trader etc, and taking good bets, losing trades, and losing periods can and will happen. That is trading. But sticking to your process keeps your mind in the right place, and helps you avoid making errors such as taking on too much risk to quickly claw back losses, avoid averaging down on losing trades, avoid taking revenge trades etc.

The other point about financial or performance goals is that, subconsciously, they can place a limit or ceiling on what you can achieve. Keeping your goals process orientated means that you do not put any such restrictions on your trading. Like a good trend following method, you want to limit any downside, but not place any restriction on the potential upside.

Remember that no-one has all the elements present to achieve long-term trading success from day one - even the Market Wizards of this world.  Some people may have great risk controls, but be a bust at execution. Others may be strong psychologically, but may not be using a method with a positive expectancy. But this process of trying to evolve and refine your trading approach, identifying and eliminating errors or issues that crop up, is what everyone has to go through, and continue to go through once they become profitable.

The good thing thought, is that pretty much all the elements highlighted above are fully within your own control:

  • You determine your level of risk;
  • You place your orders and stops;
  • You choose the markets to trade;
  • You set aside time to carry out a review of your trading;
  • You determine how much time working on your mindset;
  • You control how much (or how little) time you put into your preparation each day or week;
  • You decide whether to override your rules or not.

While you have no control over the market, there is still so much you can control. Your trading success is in your own hands. Most losing traders cannot accept that fact. When things go wrong, they will look to blame others - or the market (which is all the other buyers and sellers).

Keep your goals focused on improving your process, and providing the basic method you use does have an edge, the results will follow.

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