All you need to do is lose one kilo a week. Yep, that’s all. Lose one kilo every week for a couple of months, and all those extra kilos will slither off into the atmosphere.
It sounds like a pretty simple plan. As the clock ticks over into 2017, there will be countless people making such resolutions to lose weight, travel to postcard locations, pay down their debt, or tick off another thing from their bucket list.
And that’s the way we’re told to do it, isn’t it? Set your goals, write a plan, and stick at it until you get there. Of course, sticking at it is the hard bit. If only the ‘doing’ was as easy as the planning — that, we all know…
We admire those that set out their plans and achieve them, whether it’s a sporting story or growing a business. It’s a mindset that we want to emulate ourselves.
But it’s a mindset that sometimes doesn’t translate into every endeavour. Like the financial markets.
Goal or fantasy?
If you decided today to become a full-time trader, how would you set your goals? Typically, with a goal, we start at the end goal and work backwards from there. Much like losing weight, for example.
You’d probably first work out how much money you’d need to meet all your commitments — all the usual stuff, like your mortgage, car payments, rates, bills and any other expenses that come your way.
You’d then work out how much you need to make every month, dividing it down further into a weekly target. It sounds like a sensible way to approach it. All you need to do is reach your stated target and everything will be just fine.
But the problem with setting goals in the financial markets — much like any business — is that you have absolutely no idea if it can be achieved. What might seem like a completely reasonable target can quickly become fanciful if the market doesn’t cooperate.
No matter how much we plan, it’s the market that decides how much money we make. No amount of goal setting will do that for us.
Implement the plan
As a trader, it’s tempting to set a desired dollar amount of profit from each trade. And it’s what I did in my first year as a floor trader.
Every morning, I would walk into the pit with a set goal of how many ‘ticks’ I needed to make that day. Each tick — a 0.01 point move in bank bill interest rate futures — represented a $20 profit per contract, after paying brokerage.
I had it all worked out. I bought or sold a set number of contracts each trade, with a clear understanding of the number of successful trades I needed to make every day to hit my target. But it often didn’t work out how I planned.
While having a target provided motivation, it could also work against you. Once I hit the target, it was tempting to let other potential profitable trades go, for fear of giving profits back. Or, sometimes, it was a case of the mind starting to drift once the goal was achieved.
But, on some days, the goal was simply unachievable. It all hit home when the market went through a really quiet patch. Not just for a day or two, but for several weeks (that then rolled into a month). Nothing, and I mean nothing, was happening anywhere. The markets were completely dead.
If any trades did come through the pit, it was like watching a million seagulls fighting over a chip. It was impossible to hit a daily, or even weekly, target — there just wasn’t enough market action to make any financial goal achievable.
It also meant that traders started chasing any trade in the hope that it would go their way. That meant getting into trades with a low probability of success. It took me a year to realise that this approach doesn’t work.
It’s all about implementation
Rather than concentrating on a set financial target, we need to aim at nailing our trading plan. That is, we should judge our success as traders on how well we implement this plan, rather than just aiming for a predetermined dollar amount or percentage return.
That means not only getting our entries right, but, even more importantly, our exits, too.
It’s tempting when some trades are going well to ride our losing trades past their exit point, with the hope they’ll come back our way. That is, to treat the money from profitable trades as a buffer to absorb the losing ones.
But each trade needs to stand on its own merit. That means cutting the losers at the point where it’s evident that the trade is no longer viable — a level we establish before we put the trade on. By doing so, it means that we have our capital ready to go when the next trade comes along.
Trading is a process. It’s this process that we need to focus on to become successful traders. It also helps take the pressure off, because we can then focus on the one thing we can control — our trading plan — and let the market take care of the rest.
That’s why, over at Total Income, I not only offer monthly stock recommendations, but I work with my subscribers to help master the trading process. My goal is to help you create your own effective trading plan. You can find out more here.
For The Daily Reckoning