Managing Editor’s Note: Today, we’re handing it over to colleague Larry Benedict – a market wizard and legendary hedge fund manager.
In this essay, Larry shares why making big goals for the year as a trader may be more counterproductive than you think…
Here’s Larry with the insights…
Why Setting Goals Can Be Dangerous to Your Portfolio
By Larry Benedict, editor, Trading With Larry Benedict
Goals…
We’ve all heard how important they are a million times since we were kids… and how we should set them to achieve what we want out of life.
But it’s not always the best advice when it comes to the markets.
In fact, setting goals can actually be dangerous.
Today, I want to explain why… and share a far better and more realistic approach.
It’s something I still use to this day…
Unrealistic Goals
I started my career in the trading pits of the Chicago Board Options Exchange almost 40 years ago. There, I saw a lot of people come and go from the market.
And I mean a lot…
Some couldn’t cope with all the pressure.
Simply trying to get their trades filled was too overwhelming, with hundreds of people screaming at each other at the same time.
I don’t mean that as any criticism…
Until you’ve stood there with your pen (to physically write out the old trade confirmation dockets) and your wits, it’s hard to appreciate how competitive it was.
But the one characteristic that undid most new traders was something beyond the sheer energy of the trading floor.
And it applies as much today as it did then…
Most newcomers (and sometimes even old hands) set far too unrealistic goals.
They simply wanted to make more money than the market would allow them.
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Playing Catch-Up
One of the key parts of goal setting is a fixed end date.
That way, you can break the goal into a series of what should be steady, achievable targets.
And I say “should” for a reason. This is where so many traders come undone…
Take, for example, a trader who sets themselves a goal of making $100,000 in their first year.
Their daily goal becomes a piece of basic mathematics…
Divide that $100,000 by roughly 50 weeks in the year. That breaks down to $400 a day.
The problem arises when that trader misses the daily target… and decides to double the size of their trades the next day.
Or if they have a rough few weeks, they go in big the following month trying to play catch-up.
But overtrading, trading too big positions, or taking low-probability trades will almost certainly make matters worse…
Another losing month followed by even bigger catch-up bets sets off an inevitable downward spiral that eventually puts them out of the game.
Different Approach
That’s why I learned from blowing up my own trading accounts multiple times over that you need a different approach if you’re going to survive.
If I have a rough trading period, I don’t double up the size of my trades.
Instead, I do the opposite.
I halve the size of my trades until I get things back on track. And if that doesn’t work, I halve that size again.
All the while I still steadily bank any profits I can…
I don’t hang on to a winning trade longer than I should in the hope of making more money to catch up my account. Doing so will often turn a winning trade into a loser.
And the biggest change I made was to switch my overall approach…
Rather than focusing on an ambitious profit target, I judged my performance based on the available opportunities.
If the market was flat and quiet one day, I wouldn’t be too hard on myself if I didn’t make a whole lot of money.
But if the market was busy the next day and I missed a lot of opportunities, I’d push myself to try to do better.
I learned to only trade what was in front of me and not chase some far-flung goal.
It’s also when my career really started to take off.
And if you too change your focus like I did, your trading can take off, too.
Regards,
Larry Benedict
Editor, Trading With Larry Benedict