Saturday, November 14, 2009

Setting Goals: A Trading Coach Essential

For those just dropping by, this is the fifth post in a series. The previous four posts have been:

Several of the posts above discussed learning loops as the essential component of performance development. We become better performers when we learn from previous efforts and use that learning to guide future efforts.

The glue holding together these learning loops is goals. Goal-setting is what differentiates the intentional, process-driven, performance-oriented trader from the trader on autopilot.

This post provides a good introduction to goal-setting. Setting effective goals is also the subject of Lesson 34 in the Daily Trading Coach book.

Traders commonly make several mistakes in setting goals:

* Too Distant - By setting goals at very long time frames only, they do not concretely guide day to day, week to week performance;

* Too Vague - Goals should be process-oriented and spell out clearly what, specifically, you will be doing in the future and how you will be doing it;

* Too Burdensome - Traders will tackle too many goals at once and give up on the whole effort when it becomes overwhelming;

* Too Unrealistic - Traders will set perfectionistic goals ("I will make money every day of the week") that they cannot control and that leave them feeling discouraged when not reached.

One component of goal-setting that is often ignored is rewards. We're more likely to sustain an activity when we find it intrinsically and/or extrinsically rewarding. Let's face it: hard effort in any performance domain--whether it's physical conditioning in sports or countless rehearsals in preparation for a stage play--is not always fun. Even the most dedicated performers have to push themselves to reach their peak performance: that pushing means they necessarily go beyond their comfort zones.

Rewards provide an incentive for those pushes. In trading firms, one important incentive is capital allocation: traders are allotted larger buying power when they produce positive results. Trading firms that are well managed also provide meaningful psychological rewards, in terms of peer recognition.

Independent traders coaching themselves generally structure their own rewards. Those can be as simple as special vacations paid for out of market winnings: shared rewards are often doubly rewarding. In my own trading, I allocate size based upon my results during the year: that creates a tangible incentive to build profits and refrain from overtrading.

Although I prefer process goals (goals that entail trading well) to outcome (P/L) goals, I do emphasize in my own trading the goal of being profitable each month. This helps me manage risk during the month and also provides a benchmark for success that can be a focus each day and week.

Open your trading journal: What is your goal for today's trading? For this week? How will you know that you've reached your goal? What, specifically, will you do to achieve your goal? These are the questions that bring learning loops together. If they're not in your journal, the odds are good they're not there in your head--or in your trading.