Goals
One of the most important but least discussed facets of successful trading relates to outlining goals, identifying conflicting goals, prioritizing, and going back to the top. An example is probably the easiest way to illustrate what I mean.
Let’s say I have two goals:
To make 100% a year
To avoid any drawdown over 10%
While a few exceptions exist, these two goals have a very low chance of coexisting. I can certainly find people who made 100+% a year and copy what they do/did but it is unlikely that I will be able to do so without violating the second goal (10% drawdown). If I decide I really want my drawdowns to remain above 10%, then I probably can’t return 100% a year (or anything close to it).
Ultimately, unless I find myself in a golden era for my approach (more here) or I find some new “unicorn” strategy before anyone else, I’m going to run into problems if I pursue conflicting goals at the same time.
Quick aside on “unicorn” strategies, these usually only happen to guys at banks who have these opportunities fall into their laps by virtue of new markets and inefficiencies - think the advent of convertible bonds and related mispricing.
So, if I march forward hoping to get two goals that likely conflict, I’m setting myself up for failure and all the related problems that failure in trading brings (abandoning strategies, emotional thinking, overtrading, etc).
A much better approach involves clarifying goals, identifying conflicts, prioritizing, and coming up with something that has a decent chance of working.
Going back to the example, if I shoot for a 100% return, I’m likely going to have to endure drawdowns over 10% thus I should prioritize goal #1 and accept goal #2 likely won’t be met. Alternatively, I could prioritize the drawdowns (goals #2) and accept that my return goal likely won’t happen.
It sounds very simple, and it is, but I find it rare for neophyte traders to think this clearly thus they tend to run into snags and either quit or, over time, learn to be more clear and concise. Surprisingly, to me at least, there isn’t a lot on goal setting in trading literature. People usually jump to trying to find a “Holy Grail” algo versus contending with reality.
Bottom line, consider identifying your trading goals as succinct bullets, looking for probable conflicts, prioritizing the goals mindful you probably can’t have it all, then proceeding with a plan that has a reasonable chance of success in the context of reality. Doing so should increase your odds of a successful outcome (as defined by your hierarchy of goals) by a big margin.