Profit Goals

Whatever venture I undertake I always have a goal. A big section of my Lifestyle Book is specifically on goals. See:


In trading it is just as important to have goals. The reason is that without a goal you can simply drift. A goal focuses you on an outcome.

Each goal must have three attributes

1.It must be achievable.
2.It cannot be too easy to achieve.
3.It must be measurable.

The following statement for example is not a goal:

To have a great year’s trading.

Whereas the following statement is a goal:

To make a 30% return on my capital this year.

First, it is achievable, second it will require you to work hard to achieve it and third, on 31 December year you will know exactly whether you achieved your goal or not.

I recommend two types of Trading Profit Goals:

1. Goals for Each Trade

You should not enter a trade unless there is a very positive reward to risk ratio. There are a number of ways to calculate a reward to risk ratio.

For example if a trade has an equal dollar likelihood, say $1,000 gain vs $1,000 loss, you would need to have a very high probability on that trade in order to take it, say 80%. Therefore:

Gain probability $1,000 x 80% = $800

Loss probability $1,000 x 20% = $200

Overall probability: 4 : 1 ratio.

However for some trades there might be a $5,000 gain vs $1,000 loss. In this case you would be happy with a 40% chance of the trade being profitable so:

Gain probability $5,000 x 40% = $2,000

Loss probability $1,000 x 60% = $600

Overall probability: 3.33 : 1 ratio
No matter how you calculate it, your calculation must result in you having a significant reward to risk ratio. I recommend at least a 3 to 1 profit ratio. This does two things. One, it forces you to only take the best trades and never 50:50 trades. Two, if you are overly optimistic in your evaluation of your probabilities (like most traders) you still have a good cushion.

2. Goal for the Year

All goals focus you. That is their main function. If your starting capital is $100,000 and you know your goal is to make $30,000 profit, you will focus on how you will go about achieving that goal. If after six months you are up only $5,000 you will know that you need to change what you are doing because you are not on track for your goal.

Now here is a key point about annual goals. The very best traders/investors in the world average around 30% per year. This includes the richest man on the planet Warren Buffett and the legends George Soros and Paul Tudor Jones. Of course there are also people who have astonishing returns over short periods and it is not uncommon to see triple digit returns for individual traders with relatively small account sizes. But remember if the best and wealthiest in the world return about 30% per year, do not be in a hurry to write down that your goal is 500% per year.

You would be amazed the number of new traders I have mentored who think they can start with $10,000 or $20,000 and earn $50,000 per year trading. The chances of that happening are less than winning the lottery.

You may have read that in my first year of full time trading I had a return of 171% and in my second year I had a return of 210%. These figures are correct but first you have to remember that I had 17 (seventeen) years of part time trading before I turned full time, so I knew what I was doing. Second, in hindsight I took way too much risk. Third, I was fortunate that in both years I got onto some really huge trends that effectively gave me my return. In other words my trading was far from consistent.

Conclusion

Set Trading Goals. It will focus your mind and improve your trading results.
 
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