How to Set Trading Goals

by Darrin Donnelly on January 6, 2016

I’m a big believer in the power of goal setting. There’s plenty of data to back up the fact that people who set and write down clear goals are much more successful than people who don’t.

However, traders need to be careful about HOW they set goals. Many traders start the new year, quarter, or month by setting a goal of achieving a specific percentage return on their portfolio. For instance, a trader may set a goal of making a 100% gain in the next year.

Setting trading goals like that is a big mistake and here’s why.

First off, a 12-month return is rather arbitrary when you think about it. What does it really matter where your portfolio stands on December 31st if you lose half of that portfolio two weeks later?

Secondly, there are too many factors that the trader has zero control over to make a specific percentage gain a viable goal. As traders, we must have the discipline to wait for quality trade setups before entering a trade. If the market fails to give you that quality setup, the last thing you want to do is FORCE yourself into a trade that fails to meet your system’s standards.

When a trader starts the year with a goal of earning a 100% return, that trader will grow frustrated and antsy if summer rolls around and he finds himself up just 10% (or down). That trader will then start to chase questionable trades because he feels the need to make up ground quickly in order to hit his goal of a 100% gain for the year.

This type of mentality often causes traders to make some of their worst trades late in the year.

For trend traders especially, often times the best trade to make is no trade at all. In a trendless, choppy market environment, you can lose a lot of money forcing yourself in and out of trades that quickly reverse on you.

The secret to successful trend trading is knowing that eventually the market ALWAYS shifts into a strong trend and THAT’S when the big money is made. You have to be patient during the choppy periods so that you can take action when the big trend kicks in. You can’t force it though. You have to be patient and disciplined.

Study the monthly returns of the famous Turtle traders and other successful trend followers. Read the books by Nicolas Darvas, Jesse Livermore, William O’Neil, and other legendary trend traders and study their short-term returns. What you’ll notice is that the bulk of the big annual gains they achieved often occurred during very short two- or three-month windows. They then had the discipline and patience to either hit the sidelines or scale back when big trends failed to emerge or stocks failed to properly set up.

So, how should a trader go about setting goals if he’s not going to use specific percentage gains as his goal?

The answer is that your goals should focus on the process of trading and NOT the results.

Instead of saying your goal is to achieve a 30% return this quarter, you should set a goal of limiting every loss to no more than 2%, for example. Or, only entering trades that meet 90% or more of your ideal fundamental requirements. Or, developing a precise system for how you will scale in and scale out of a position. Or, keeping a detailed trading journal for every trade you make this year. Or, having the discipline to sit on the sidelines and wait for only the best technical setups. These examples could go on and on, but you get the idea.

Set goals that you have complete control over. Don’t set goals that focus on results that are often out of your control. You can’t force the market to give you proper setups right when you want them.

Now, having said that, I think it’s important to have a general sense of what type of gains you want to achieve as a trader. This will help you determine how much capital you’re comfortable risking on a trade, how much margin you’re willing to use, and what type of trading system you want to implement. For instance, as I get older and become a little more risk averse compared to where I was in my 20s, I generally seek to achieve an annual return in the 30-50% range. But I purposely keep this figure broad. If I achieve a 100%-plus return over a 12-month period, great! But I don’t allow myself have a set-in-stone goal like a 40% annual return because I’ve been in this game long enough to know that during some choppy market periods, a 10% return is a major success – as long as I’ve been disciplined and followed my system’s rules.

(The trader willing to risk more will obviously be seeking higher general returns, but he must be willing to accept higher drawdowns as well. The opposite is also true: minimizing risk will limit drawdowns, but that also means that overall returns will generally be lower.)

The point is that the percentage gain you seek to achieve over a specific time period should be kept in a broad range with plenty of wiggle room. That way, you don’t find yourself FORCING less-than-ideal trades in an effort to obtain a specific (arbitrarily-set) percentage gain.

Focus on the process, not the results.

In all my years of trading and coaching other traders, I’ve found that when you shift your focus to the PROCESS of being disciplined, properly sizing your positions, and only making high-quality trades; your RESULTS will end up being phenomenal in the long run.


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