Sunday, September 02, 2007

Goal Setting for Traders: What Works

It is often thought that setting goals is helpful for motivation and performance. The psychological research, however, suggests that this isn't the case. Goals can either help or hinder performance, depending upon how they are structured. If traders are going to act as their own trading coaches, it is important that they know how to set goals that are most likely to produce good results.

The research of Locke and Latham suggests that goals impact performance in several ways:

* Directing - Goals direct our activity toward priorities and away from aspects of performance that are less important.

* Energizing - Goals can motivate us to pursue particular ends, particularly if the goals are sufficiently challenging that they prod us to make special efforts.

* Persisting - If we have a valued goal, we are more likely to persist in efforts at performance improvement than if goals are lacking.

* Knowing - Goals activate knowledge and skills that are relevant to performance improvement.

Goals will be most likely to accomplish the above if performers are committed to their pursuit and truly value those goals. Locke and Latham note that a public commitment to a goal can be highly effective, enhancing the performer's level of dedication and effort. Performers also need to believe that they are capable of reaching their goals (self-efficacy), and they need to set goals that are neither so easy nor so difficult that they discourage sustained efforts.

A large body of research, including the work on deliberative practice, suggests that goals are not effective by themselves. Rather, it is regular and accurate feedback about goal progress and attainment that facilitates learning, skill development, and motivation. Traders will often set a goal and then set it aside, hoping that the mere act of setting an objective will be helpful. Rather, the value of goals is in their ability to channel efforts at learning. Tracking goal progress and creating new subgoals based on this regular feedback lies at the heart of expertise development.

Goals are also most likely to be effective if they are relatively short-term, channeling immediate efforts and providing rapid feedback. That doesn't mean that long-term goals are irrelevant or unhelpful, but rather suggests that a performer will derive the greatest benefit from dividing long-term goals into concrete short-term objectives.

Finally, there is evidence that process goals can be more effective than all-or-none outcome goals. A process goal for a trader might be to limit losses to a certain number of ticks per trade; an outcome goal might be to make a certain dollar amount per week or month. The latter is highly dependent upon market conditions and not entirely within the trader's control. Process goals, alternatively, focus on what the trader can control directly and thus reinforce self-efficacy.

The proper setting of goals, tracking of performance for feedback, and creation of new objectives is a fantastic use for trading journals. If your goal pursuit and journaling feel burdensome, there's a strong likelihood that you're setting the wrong kinds of goals. Ideally, goals should challenge and motivate us, build our skills, and enhance our sense of mastery.


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