Setting Trading Goals for 2010

01/14/2010 12:01 am EST


Ron Wagner

Principal Partner,

The major market indexes put in gains of 1.8% - 3.1% for the first week of the new year (and new decade). Most of this was accomplished last Monday, as you know, which then ended up giving us much smaller range-bound moves most of the week. Most traders could take great gains from individual sectors and/or stocks within those sectors by being very specific in their choices. Many took some great profits from the gaming industry on Monday and Tuesday, and more specifically, from stocks such as LVS and WYNN. By being very selective on stocks you trade, you can take larger percentage gains out as compared to the general market moves. Myself and many others love trading in this fashion!

This week kicks off the start of earnings season, and over the next many weeks, everyone will be dissecting the earnings warnings along with upside surprises to try to come to a conclusion as to how rosy (or not so rosy) the future looks. The market last week had several pieces of bad news with very little good news, and yet, as you can see, the market will move based on sentiment. This is the best indicator of them all, and is the only reliable way to read the action in the markets.  Everything possible is represented in where people put their hard-earned money to work, and this is, of course, represented in price and volume bars. As you know, there is absolutely no indicator in existence that is leading and/or that is not created by price and volume. So why not look at price and volume to make your decisions before you risk your hard-earned money? Believe me, it’s the only really reliable way to make good decisions for your trading and investing.

The market can always go higher or lower than any of us ever expect it to go after substantial moves in either direction.  What is important for us to do as traders and investors is be objective, tighten up our profitable trailing stops, only take very high-quality trades, and even shorten the time horizon with which we trade in order to protect ourselves.

Today, I want to return once again to the topic of trading goals. As you've probably guessed, I'm addressing this subject matter now because of the start of our new year and new decade, and the fact that January always brings an opportunity for new beginnings, and thus, new goals.

Here's the part of this conversation that really excites me. In question format, we would ask ourselves something along these lines:

"What am I trying to accomplish when I trade?"

Here are a few possible answers to this question:

1) I'm trying to make as much money as possible.

2) I'm trying to risk as little money as possible.

3) I'm trying to make a living.

4) I'm trying to make some consistent returns.

These are just a few sample answers, and obviously, there is no definitive right answer to the question. However, if I may, I'd like to steer you away from some of the answers above, and in the direction of others that tend to be better for one's overall trading attitude. First of all, I highly recommend that you strike that first one from the list entirely! Professional trading is not about swinging for the fences, and anybody who adopts the attitude expressed in answer number one is likely headed for a rude awakening. "Betting the farm" will eventually lead to losing the farm in the stock market.

So then, should we adopt the attitude in answer number two, trying to risk or lose as little as possible? Honestly, this is a better answer than the first one. At least we are focused on our downside potential instead of our upside potential, and in trading, that's always the better place to focus. If you are utilizing an effective trading approach and keeping your eyes on your downside risk at all times, you'll probably do pretty well. So, while this answer may sound a little negative in its focus, I guarantee to you there are some serious merits to looking at your trading through the angle of simply trying to defend your capital—especially if you are new to trading or investing your own accounts.

How about answer number three, trying to make a living? Let's face it, that's what most of us are after in one form or another when we trade. And yet, does it serve us to make that the goal? It honestly depends. The danger is that we will fall into some of the traps common to everyone, such as forcing the issue when the market conditions may not be conducive to doing so. If you need to make the rent in the next five days, and pulling the money out right now will drop you below the margin minimum, well, do you think you'll be in the correct frame of mind during the next few sessions as you try to "scrounge up" the money? My guess would be no. Ideally, a trader would practice both income generating and wealth building styles, and the former would take care of things such as rent and day-to-day needs while the latter compounded the savings. Still, even under this ideal scenario, I caution traders against being too "money-centric." Dollar counting is one of the many pitfalls that traders fall into. It’s always best to trade because of the high probabilities of a potential trade or investment, and not because of other pressures.

How about answer number four, trying to make some consistent returns? Okay, now we are getting somewhere. I like this one for several reasons. First of all, the lack of specificity takes away the pressure that we have been discussing. But more importantly, the emphasis here is on consistency, not magnitude. The truth is, the most defining quality in a professional trader's results is his or her consistency.

If you can't make money consistently as a trader, then you still have further to go in your development before you can truly consider yourself a professional. However, let's make a few things clear about answer number four. You need to define your time frame. For a core trader to expect consistent gains on a day-to-day basis is completely unrealistic. To expect them on a week-to-week, or even month-to-month basis, is really pushing it. The smallest legitimate measuring period should be a quarter, and quite frankly, it's a better idea to think in terms of yearly returns. So, as long as you define your time frame correctly, then making consistent returns as a trader is the best idea. For a swing trader, monthly and quarterly reviews of your goals are best. For an income producer, you should review your results weekly and adjust your plan to maximize your potential.

Personally, my answer to the question goes something like this: "I'm looking to make consistent gains, in the safest, most predictable manner possible.” This goal steers me to certain types of markets, certain types of stocks, and certain types of setups.

And that is all any of us are looking to achieve. What is the best way for us to trade given our circumstances and personal makeup? One of the very first steps to determining that is to sincerely ask yourself the question at the top of the letter, and then come up with an answer that is both honest and motivating. Try it out and I think you will find the process very rewarding. 

Until we meet up again, stay safe and remember, no one is making you trade! So, only take trades and investments that line up with the highest probabilities that fit into your specific plan!

By Ron Wagner

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