Wednesday, October 22, 2008

Setting Trading Goals

After talking with many beginning traders, I've seen a common theme that often limits them from their full potential. Unrealistic or undefined goals.

Now one of the reasons for this is that most beginning traders want to make money the same way they do at their day job. Make $X per day, every day. Or they have a $500 account and want to turn it into $10k.

Well I'm here to tell you that the above situations aren't very realistic. Are they achievable? I won't argue that. But what I will say is that they aren't probable. And in trading that is the name of the game. Probability.

When I meet with traders beginning their trading path I tell them, look wouldn't you like to start with a challenging but achievable goal? Like beating the top CTA's in the world? And they say that sounds pretty tough. And I say yes, tough, but achievable. All you need to do is make 30% per year with a maximum intraday drawdown of no more than 25%. And these new traders look at me like I'm crazy. "30% is that all?" they say. No way they tell me. I want to make $500 a day or turn this $500 account into $10k. So I ask them, what type of drawdown do you intend to have while doing that? They look at me like a space alien, "drawdown, no I don't want any of that". So basically, they are telling me that they want to make like 2000% per year with a 0% intraday drawdown. Put in those terms it sounds pretty looney, right? But, seriously, this is what they tell me.

I am here to tell you that you need to start with realistic achievable goals. Imagine as a beginning golfer you tell yourself and others that not only do you want to beat Tiger Woods, but you want to beat him by a ratio of 100:1. And you want to do it every day, day in, and day out. You'd be a laughing stock. No one could possibly take you seriously.

I understand that most beginning traders are undercapitalized. I understand that you "need to make money now", but these are the very weaknesses that will destroy you. It isn't the market or the evil speculators doing it to you. It's you doing it to yourself. If you are undercapitalized the best thing you can do for yourself is to not trade until you are well capitalized. Go get a second job, save your pennies, or start a small business on the side. If you don't have the discipline and drive to make those things happen then you won't have the discipline and drive to stick through a bad trading month, or quarter, or year.

Do yourself a favor and set realistic trading goals and recognize that making money everyday isn't how this business works and that you aren't going to beat Tiger Woods by a ratio of 100:1.


P.S. "Typically 3 months make my entire year. 3 months I lose, 6 months are small winners to breakeven. But those 3 months make it all worthwhile." Loosely paraphrased from Phil McGrew.


Jules said...

Great post, LT! Really strikes a chord :-)

The 25% drawdown bit is really news to me.

I gather although we all start out knowing that losing is part of the game, deep within, we don't really want to.

My biggest problem so far is not knowing how to accept losses as a mere cost of doing business. Losing trades devastate me.

Lord Tedders said...


Yeah I had a hard time accepting that in the beginning. My systems range from making 75% per annum with a 25% maximum drawdown up to about 10% per month with a 25% maximum drawdown. Can't escape death, taxes, drawdowns.

Drawdowns are a reality of trading. Anyone who doesn't accept that drawdowns happen is in for a nasty surprise eventually.

Understanding our emotions is the key to trading. I still have the emotions; I am not a robot. However, I see trading as a numbers game. Like sales. You have to call 1000 customers, to get 10 leads to get 1 sale. So you have to take 100 trades to make $10 while accepting that you will lose $7 and thus net $3.

I focus my emotions to be happy when I trade my plan and disappointed when I don't. I still feel good when I'm winning and bad when I'm losing. However, I am able to moderate those feelings and know that trading well (following plan) will mean money in the long run and trading poorly (not following plan) won't.


The Lonely Trader said...

Haha! 25% is nothing! Try 40%!

sdwl said...

LT, in bare minimum terms, what is sufficiently capitalised?


Lord Tedders said...


To trade part-time or to rely on your trading income as your sole source of income? These are very different. Also what market(s) are you trading and what style (swing or day trading)?

Since most people ask this question in terms of relying on trading income as sole source, I will answer it as such and give you an idea from the most aggressive to the most conservative.

On the aggressive side, assuming you are trading futures or Forex and assuming you are daytrading and making at least 200% per annum with 25% max DD:

$50K minimum ($35K to trade $15K to live on). This will mean making about $70K gross. This also assumes that your family is willing to live frugally off of about $50K per year($35K net of tax) (as you need to remaining $20K (15K net of tax) to build your account). As you can see this is living on the edge (assuming you have a family - more doable if you are a bachelor).

Conservatively I would say that $200K would ensure that even a swing trader would be able to make enough to provide for their family (trade $150K and live off $50k) assuming your swing trading makes about 75% per annum with 25% max drawdown. This would make about $110K per year, of which you would live off about $75K gross ($55K net), and leave $35K ($25k net of tax) to build your account.

Notice how in both scenarios one should always have a savings fund (to provide for you and your family when you are having a drawdown).

These are just guidelines of course and having more money is always better (assuming you know how to trade well), but of course many traders have done it with less. Many of the market wizards started with today's equivalent of $15k and $10k to live off and have made millions. Although that seems a little tight to me :)