Investor Trader Goal Setting Habits
Profitable Trading Investing Habits
Goal Setting for Traders and Investors — You’re Doing It Wrong By Dr. Van Tharp Trading Education Institute
“…Proportion of people who successfully complete a New Year’s Resolution: 8%.”
— University of Scranton study published in Journal of Clinical Psychology
With the New Year coming fast upon us, I’ve been motivated to write a series on a very important topic: goal setting.
The good news: when properly done, goal setting is a powerful tool.
The bad news: You’re doing it wrong.
Recently, the most comprehensive study I’ve seen on New Year’s resolutions was conducted by the University of Scranton and published in the prestigious Journal of Clinical Psychology.
New Year’s Day is a big deal. It’s the most celebrated holiday in the world. And in the U.S., more people make New Year’s resolutions (45%) than watch the Super Bowl (~33%).
But as we saw in our opening quote, we’re pretty lousy at keeping them. Only 8% of people who make resolutions successfully complete one.
So, as a society, our goal setting prowess can stand a bit of an upgrade. Over the next few weeks, I’m going to share what I consider some of the best work being done on goal setting.
We’ll bust some myths. (Ever heard about that famous Yale study on goal setting? Stay tuned for full disclosure in an upcoming article…)
We’ll spark some controversy.
And when we’re done, you might just have some of the best thinking on goal setting for traders and investors to use as a foundation for your planning in the New Year. A bold statement, but it’s a journey worth taking! Let’s get started…
We’ve all heard about the importance of goal setting. I helped write a very insightful chapter in Van’s book Financial-Freedom Through Electronic Day Trading more than 15 years ago. In working with thousands of traders, from those who are brand new to former floor traders, I’ve found that most do goal setting for their trading wrong! In fact, there’s a growing body of work that shows that goal setting done the wrong way, especially stretch goals, may be counter-productive (see, for example, Goals Gone Wild, by Ordonez, et al, a 2009 report from the Harvard Business School).
Goal setting is not a cure-all. And in trading it can be downright harmful if done poorly. In this section, I’m going to give you some guidelines for how to set goals at every step of your trading journey – and since I developed this particular approach to goal setting, chances are that this is the first time you will have seen this useful and easy method. And the good news is that this approach takes much of the anxiety out of early goal setting and allows you to learn the art and science of trading in a low-stress way!
So let’s look at the two classic ways to set goals. There is an ongoing controversy over which way is best. Below, we’ll settle this age old controversy and provide some guidelines for how traders (whether you’re new or a seasoned veteran) can learn fastest by combining the two methods.
Every great debate must have two strong, compelling and competing view-points. Just think of the great debates of our generation:
Nature vs. Nurture: Which plays the most important role in a person’s success or failure — is it their genes or how they were raised?
Privatized Social Security vs. Government Invested Social Security: Should we allow citizens to direct the investment decisions for their tax-sponsored retirement savings or not?
Tastes Great vs. Less Filling: Okay, this debate has two problems. First, Miller has largely abandoned this hugely popular ad campaign. And secondly, every light beer out there (including Miller’s anemic entry) tastes lousy.
But this brings us to this week’s topic, and a serious one it is. How should traders and investors go about goal setting?
And indeed there is a controversy here. Instead of nature versus nurture, we have results-oriented goals versus process-oriented goals. And for traders and investors the differences are important.
If You Don’t Have a Dream, How You Gonna Have a Dream Come True?
Let’s start our discussion on goal setting for traders and investors with three simple words:
Make written goals!
If you don’t have trading and investing goals, chances are high that you’re setting yourself up for failure. And if your trading and investing goals aren’t written down (and reviewed regularly), then you have a much lower probability of achieving them.
I may do a whole section on goal setting later, because it is a critical activity for all traders and investors. But for this week — on to the controversy!
The goal setting debate comes down to two points of view:
The “results-oriented” camp. On this side of the tracks, all goals must be attached to tangible and measurable results. These goals are the favorites of management-types. They are also strongly emphasized among athletes who compete at a high level.
The “process-oriented” camp. Process-oriented goals emphasize the “how”. What are the things you will do to get to your end results? The adherents of this camp believe that one should focus more (or even exclusively) on the activities required to achieve a certain result rather than on the result itself.
In the trading and investing world, the debate about process vs. results in goal setting rages on. Should you set goals for how much you should make daily, weekly or monthly? Or should you concentrate on getting the process right and ignore the outcome?
Let’s shed some light on the “right way” for traders and investors to set goals by studying some common activities that almost everyone has worked to master.
Learning to walk. How do infants learn to walk? Constant trial and error, encouragement from loved ones, and patience. Here’s a question for you: How long a time period will you give your child to learn to walk? It’s a ludicrous question. The answer is, “As long as it takes!”
My son Josh was a “late” walker. He did not take his first unaided step until he was 15 months old. We were actually beginning to wonder if we had overlooked a developmental issue with him. But in a move that was quite unusual, when he finally took his first step, he didn’t stop! Most infants take a step or two or three and then flop down. Josh just kept going. He ended up taking 13 steps the very first time that he took off! I guess he was just ready.
When we are helping a child learn to walk, we concentrate on the process. Placing one foot in front of the other while maintaining balance. Taking steps that are not too big. Stepping on the ball and heel instead of the outside of the foot.
Contrast this to when the person is ready to compete in athletics. We help them get better by setting clear goals. If you want to train a sprinter, you continue to work on the process but you set clear performance goals to act as milestones for training.
Or how about learning to drive a car? (Those of you who have taught a son or a daughter how to drive, have many experiences to share I’m sure!) But when doing so, you have to concentrate on the process. You want to new driver to go a short distance without having or causing accidents. And you want them to be able to do that consistently. You don’t care if it takes ten minutes to get to the store instead of five. You just want them to operate the vehicle safely — as they improve their skills they can learn how to time entries into busy intersections and do other things that will make them faster and more efficient drivers.
A competitive race driver will have a different regimen. Instead of concentrating on just getting around the track, the driver works on issues that will allow him or her to shave seconds off of their times. Faster results and better times will be the goal for the driver on every circuit taken.
Trading and investing are learning experiences as well. And while there is no one “right way” to set goals for everyone, there are some practical guidelines that can help traders and investors at all steps along their journey to mastery. Process-oriented goal and results-oriented goals both have their useful place for traders and investors.
However, if we get the wrong mix of process vs. results goals at the wrong time in our trading career, the process can be counterproductive or down right destructive.
Here is the Key Concept that most people miss about goal setting:
While learning the intricate tasks of trading, results-oriented goals can actually damage a trader’s chance for success.
I realize that this may be a controversial concept for many readers but I’ve heard far too many stories from traders (especially newer ones) with daily, weekly or monthly profit goals who actually blew up their accounts trying to reach their goals.
A typical scenario works like this: let’s say you have a weekly goal to make $1,000 from your trading. Midway through Thursday’s session, you find yourself down by $600 for the week. As a strong, goal-oriented person, you remember that you have your goal in place for a reason — to help you adjust and strive to hit $1,000 in profits each week. At this point, the only way you can overcome your deficit and make your goal would be to significantly increase your risk, take more trades (most likely of lower quality), or pursue both strategies.
Taking either or both of these drastic steps easily starts a downward spiral. A larger position size leads first to a larger than normal loss when a routine trade goes against you. Now your $600 loss just grew into a $1,100 loss for the week. On the next trade, you put on even more size (to make up for the last loss) and as it starts to move against you, you realize that unless this trade turns around or at least breaks even, your week could be a disaster. As the price approaches your stop loss, you hope against all hopes that it will come back in your direction. But it doesn’t . . . and you let the position ride.
At this point in time, your position is down by $1,500 and your only chance for any recovery is to add to the position at the “lower cost basis” hoping that the price will turn around and save your trade. As it continues to head down, you realize that disaster is indeed upon you and you just let it move a “little bit” further against you. It keeps moving and since you’ve already passed your stop loss price, your only guide for when to get out now becomes the point at which the pain is too great to bear. You finally punch the button for a $9,000 loss on the trade and with your previous losses, wind up at a minus $10,100 for the week. It’s then that you realize that you have just lost 10 times what you were trying to make, your goal.
I wish this tale was hypothetical but it is real and all too common. Van even has a label for this phenomenon; he calls it the “loss trap”. As told, this was a reconstruction of one actual trader’s tale just as he related it to me recently — I simply rounded the numbers a bit to make it more generic.
Results-oriented goals can be a powerful tool — when used at the right time and in the right timeframe. Next week we’ll look at some guidelines for process goal setting and results oriented goal setting at various stages along your learning curve.
Today, we’ll dig into some guidelines for goal setting early in your trading journey — later on we’ll move onto to some suggestions for more seasoned traders and investors.
Let me start with an additional thought on what “early in your trading journey” might mean for you. Having had the opportunity to teach thousands of actual and aspiring traders and investors, I know that some people are just getting started. Others have been at it for a while.
Here’s a key point to add — that seasoned traders and investors need to hear: It’s important when learning a new trading strategy or applying an old favorite to a new instrument to treat yourself as a beginner at that particular strategy or instrument and focus on the process of trading until you’ve acclimated yourself. With that said, let’s jump in…
The Process Goal vs. Results Goal Balance
As I have said in previous parts of this series, results-oriented goals can be a powerful tool — when used at the right time and in the right timeframe. Let’s look at some guidelines for how to use goal setting at various stages along your learning curve.
The beginner. As with the learners that we looked at in earlier articles (a baby learning to walk or a teen learning to drive), traders and investors in the early stages of learning their craft should concentrate on the process of trading and learning the basics safely.
In addition to using very small position sizing, those new to the field should concentrate on the process. To do this, Van suggests that traders should do a daily debrief where they ask themselves one question, “Did I follow my system today?” If the answer is yes, then a reward is due whether money was gained or lost. The reward can be as small as a verbal pat on the back.
I remember Van teaching about this point in a Peak Performance live seminar in Cary two decades ago. The soundtrack is stuck vividly in my mind. Van said that if you followed your trading system today give yourself a pat on the back. If you followed your system and lost money, give yourself two pats…
That’s a powerful reminder about how important following your process is — at any stage in your trading journey.
The most useful results goal for a beginner is this: get to a breakeven rate at the end of “x” number of months. Note that I said “rate” not account level. If you have to earn back your losses to meet your goal, you put yourself in a position where larger risks or marginal trades must be taken to reach your goal. However, if you only strive for a breakeven “rate” then several weeks or months of breakeven performance will allow you to reach your goal. Then the losses you incurred up until that point can be counted as tuition, not a burden to be replaced. This really takes the pressure off of the beginner and allows you to concentrate on doing the right things — following your process.
A last useful tool for the beginning and breakeven trader is the use of a maximum loss cut off per day / week / month. If you institute a maximum loss level (and honor it!) you can avoid the type of downward spiral that I described earlier in this article.
As George Leonard explains in his book Mastery (Penguin Books, 1992), the journey to mastery of a new skill is not a linear one. He illustrates this with a “mastery curve.” If you were to draw or graph your progress in learning a new complex skill (such as trading), it wouldn’t look like a straight line of constant improvement. Instead, you see a burst of dramatic improvement when you start out, as you are inundated with new information and become proficient in brand-new skills.
Sooner or later, however, your progress starts to level off as you learn to handle the basics, and improvement becomes less noticeable. These plateaus, or periods of stagnation, can be very frustrating, as you feel that you’re not really seeing any returns on your hard work. However, they are a natural and necessary part of the learning process.
In the next installment of this series we’ll look at some goal-setting guidelines for traders who have achieved consistent breakeven performance and how successful traders can use goals to make step changes in their results.
Goal Setting for More Seasoned Traders
Fortunately, there is credible research that confirms the usefulness of goal setting – for every level. Locke et, al (1981), Medin & Green (2009) and Bipp & Kleingold (2010) have found that goal setting led to higher performance. Using the right type of goals at the right time, however, matters greatly.
As previously stated I cautioned, seasoned traders starting a new strategy and all beginning traders should focus on process goals. Traders with some experience, however, can start to integrate results-oriented goals into their trading. Here are some useful guidelines for two types of traders with experience:
The break even to slightly profitable trader. Once you can consistently break even in your trading or you can make profits on a regular basis, you can begin to add results-oriented goals to your process goals. These performance goals should be reasonable but also, they should require you to stretch yourself a bit to reach them. At this point, you have learned to avoid losing big money and now probably need the challenge and discipline that results-oriented goals can provide. Continuing to refine your technique by monitoring your process-oriented goals is a very necessary part of a trader’s growth at this stage. Results-oriented goals also require you to evaluate critically your trading system or strategy. If your trading results consistently fall far short of your goal, it could be that your strategy, as it is written, can only produce results that are little better than breakeven. If you want to do better, you may realize your systems could need some work.
The successful trader trying to make step changes in performance. Here’s where results-oriented goals really come into play. Dr. Ari Kiev has chronicled the changes that successful traders make when they really stretch themselves. Like athletes at the highest levels of sports, traders who have mastered their processes need to constantly review their performance and evaluate areas where they can make further improvements. Results-oriented goals that really stretch performance on a regular basis serve two purposes for successful traders.
First, they give traders a constant reminder that they have to perform at a high level – no coasting allowed.
Second, the goal setting process demands regular performance reviews so that performance can be optimized through the feedback process.
Hopefully, you can see how goals for more seasoned traders will be different in kind than for newbies. The right kind of goals at the right time create effective goal processes. I also believe strongly in the importance of writing down goals . . . even if one well-known story might not have happened.
The Famous 1953 Yale Goal Study
Chances are that you’ve heard or read about some self-help guru extoling the virtues of the Yale class of ’53 goal study. The stories go something like this: at or around graduation, researchers surveyed the graduating class of seniors to find out how many had goals in mind after graduation. 3% of the class had specific written goals. Then twenty years later, the researchers surveyed the surviving members of that class and found that the financial wealth of the goal-setting 3% was higher than the remaining 97%! A compelling story — but one that never happened.
In 1996, Fast Company magazine completely debunked the Yale class of ’53 myth. The magazine related what they found:
“. . . the CDU(Consultant Debunking Unit) went to Yale for the last word on the Class of 1953. Research Associate Beverly Waters reports that a recent outbreak of articles citing the study in publications as diverse as Dental Economics and Success magazines prompted her to undertake an exhaustive search of Yale alumni archives — where she found no evidence that such a study had ever been conducted. Says Waters, "We are quite confident that the 'study' did not take place. We suspect it is a myth."
Myth or Not
I strongly believe that using a goal setting process can help you improve your trading. Even if the debaters over goal setting styles will never totally agree, you now have a simple goal setting roadmap that can guide you through your trading journey. Individual traders have different needs at different points in their careers so concentrating on the right type of goals at the right times in your trading journey can help you manage stress and propel you in the right direction.
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