Wednesday, September 8, 2010

Should I use a Trading Goal

From The Trading Zone

The question of whether or not to set a daily financial goal in your trading has come up more times than I can count.

Whether it be in the chat room or member training, it is a trading topic that comes up all the time.

Simply put, trading without a goal is akin to competing in a sporting event without keeping score. At the close of the market the bell is rung, the competition ends and everyone tallies their points or counts their profits (or loss).

While traders are often told and taught to trade without emotion, it is specifically the emotion of fear of loss that can keep a trader out of trouble.

In my opinion and in my experience every trader should set a reasonable and achievable daily goal and stop (or adjust) trading once their goal is achieved.

Newer traders should set a goal low enough so that it can easily be achieved 4 of 5 trading days. That goal can be as low as 1 or 2 points.

While stopping to trade once a goal is reached may not be the way to maximize profits in the short term, it will serve to dramatically increase profitability in the long run.

Too often I have seen a trader earn substantial profits from the morning trade, profits great enough that when annualized would place the trader securely in the 15 % of consistently profitable traders, only to see them return those profits to the market in the afternoon session.

So where is the downside of setting a goal and moving to a sim account.

Ego and poor guidance in my opinion are the culprits. A trader who says ‘I am playing with the houses money’ as a justification to risking an entire day of profits in my opinion has adopted a gamblers mentality that will destroy a trading career.

A trader who asserts that the market has not yet reached it’s low or high for the day and must therefore keep trading, has put his ego before his profits.

What matters at the end of the day, is that you have more money in your trading account than you started with.

What matters is what You are doing and not what the market is doing.

If the market rallies 50 points but you are not in the trade, then the move is irrelevant to your p/l.

If the market moves just 3 points and you grab those and make a 3 point profit, that is relevant.

If the daily goal you have set is 3 points and the market moves another 50 after you exit the trade, well guess what .. Exactly irrelevant.

When the market decides to deliver your setup that locks in your daily goal can happen at any time, ideally one would think this would be best at the open. However an undisciplined trader who is trading without a set goal, may continue to take unnecessary risks and end up in a loss position.

So why work twice as hard to earn half as much?

Set your daily goal and earn twice as much for half the effort.

Stop trading when you reach your daily goal is most important for newer traders as they build their confidence and build their trading accounts.

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