How to set trading goals? When you examine your financial wish list, what does it look like? Do you tell friends and family you trade so that you can supplement your income and pay your mortgage off, but secretly hope to buy a box at the SuperBowl or quit your day job instead?
It’s time to ask–why are you really trading?
When quizzed about their primary reasons for trading, 73% of people surveyed cited long-term goals such as retiring comfortably (44%), buying a home (15%) or leaving an inheritance (14%), according to a 2014 survey by the Center for Applied Research. But most didn’t know how they’d accomplish these goals.
Before blindly throwing money into the commodities, stock, FOREX, or currency markets, you better know exactly what you want. Here are some tips to strengthen your trading strategy:
Get a pen and paper and ask yourself some soul-searching questions. These will help weed out any hidden fantasies you may be harboring. For instance, is trading more about self-empowerment or profits for you?
Now, write down your top 3 goals and ask: How much money would satisfy each of these? Is there an opportunity that would make you sacrifice these stated goals? If so, what is that opportunity? Are the reasons you tell others that you’re trading the same reasons you promise yourself? Be brutally honest. Getting on the same page with what you tell others and what you really want will help you avoid confusion and arguments with family or significant others later.
When will you need the money you’re trading? It’s common sense not to trade with food and mortgage money, but people still do. Money managers and the National Foundation for Credit Counseling say you should stockpile an emergency fund of 6 to 12 months worth of expenses, in case you lose your job.
So, will you need the money you’re trading in the next 3 or 6 months, 1 year, 5 years, or 10 years? Write down these deadlines.
Does the thought of losing 25% of your portfolio value make your palms sweat? The stock market frequently drops as much as 10% a month and sometimes more. Individual stocks can drop that much in just a day. (For example, Michael Kors shares plunged 24% on May 27, 2015 after the retail brand missed earnings and lowered guidance.)
If news like that makes your stomach drop, you have a low tolerance for risk and should proceed conservatively. If your reaction is to invest more or hedge your position with puts or calls, you may be better suited for trading.
Your trading plan should include how your trades will be entered, when you’ll exit (profits and losses) and how much money you can risk. It should be detailed, outlining the markets that will be traded, risk parameters, what equals a trade and exit signal, the position size and which situations determine a trend.
An unemotional, algorithm-driven trading program like fractalerts can alert you to entry and exit points days before they happen, helping you prepare for and adhere to your trading goals.
Once you have your plan how to set trading goals, stick to it. Don’t succumb to fads (“But this is the Year of the Hover Board!”) or desperate “I’m missing out” thinking.
Author Charles F. Glassman (Brain Drain) may have put it best when he explained the importance of staying true to your methodology: “Self-discipline is often disguised as short-term pain, which leads to long-term gains. The mistake many of us make is the need and want for short-term gains (immediate gratification), which often leads to long-term pain.”