As we prepare to turn over into a new year, setting our goals is common practice.
For some, it might be fitness or a hobby. Others aim to spend more time with their family and friends.
Goals are important to achieve what we want out of life. Yet they can be tricky when it comes to the markets.
In fact, setting goals can actually be dangerous.
Today I want to explain why… and share a far better approach.
It’s something I still use to this day…
Unrealistic Goals
I started my career in the trading pits of the Chicago Board Options Exchange (CBOE) 40 years ago. There, I saw a lot of people come and go from the market.
And I mean a lot…
Some couldn’t cope with all the pressure.
Simply trying to get trades filled was too overwhelming, with hundreds of people screaming at each other at the same time.
And I don’t mean that as any criticism… Unless you experienced it, it’s hard to appreciate how competitive it was.
But one thing undid most new traders – beyond the sheer energy of the trading floor.
And it applies as much today as it did then…
Most newcomers set far too unrealistic goals.
They wanted to make more money than the market would allow them.
Playing Catch-Up
A key part of goal setting is a fixed end date.
That way, you can break the goal into a series of steady, achievable targets.
Yet this is where so many traders come undone…
Take, for example, a trader who sets a goal of making $100,000 in their first year.
Their daily goal becomes a piece of basic mathematics.
Divide that $100k by roughly 50 weeks in the year. That breaks down to about $400 a day.
But what happens when the trader misses a daily target? Often, they decide to double the size of their trades the next day.
Or if they have a rough few weeks, they go in big the following month trying to play catch-up.
But “overtrading” – trading too big positions – or taking low-probability trades will make matters worse.
Playing catch-up often sets off a downward spiral that eventually puts them out of the game.
So what is a better attitude for trading?
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A Different Approach
I learned from blowing up my own trading accounts multiple times over that you need a different approach if you’re going to survive.
If I have a rough trading period, I don’t double up the size of my trades. Instead, I do the opposite.
I halve the size of my trades until I get things back on track. And if that doesn’t work, I cut my positions in half again.
All the while, I steadily bank any profits I can.
I don’t hang on to a winning trade longer than I should, hoping to catch up my account with a big win. Doing so will often turn a winning trade into a loser.
And the biggest change I made was to switch my overall approach.
Rather than focusing on an ambitious profit target, I judged my performance based on the available opportunities.
If the market was flat and quiet one day, I wouldn’t be too hard on myself if I didn’t make a whole lot of money.
But if the market was busy the next day and I missed a lot of opportunities, I’d push myself to do better.
I learned to only trade what was in front of me and not chase some far-flung goal.
And my career really started to take off as a result.
So as you’re pondering goals for the new year, keep this advice in mind.
Setting goals can be a good thing. But having the right approach to your trading can make all the difference.
Regards,
Larry Benedict
Editor, Trading With Larry Benedict