Goal-setting plays an important role when you want to achieve success in all industries. For example, the most successful professionals in industries like real estate, medicine, and education are those who have solid goals.
This is also a reason why very often people fail to do something. They start an activity without having a definite goal in mind, and when the first difficulties arise they tend to give up.
In this article, we will look at this concept and look at the best guide on how to set up trading goals. We will also look at the idea of having a trading plan.
What is a trading plan?
A trading plan is a systematic approach that seeks to answer several important questions like what, why, when, and how.
On what, it seeks to explain the assets that a trader or investor will execute. Some traders focus on stocks while others focus on assets like commodities, forex, and exchange-traded funds.
‘Why’ explains the reason or reasons for executing a certain trade while ‘when’ answers the challenge of time when the trade or investment is made. Finally, ‘how’ explains the process in which the trade is executed.
A trading plan should answer all these questions.
The quintessential example: Warren Buffett
All successful traders and investors have a solid plan for executing trades. For example, Warren Buffett often looks at several important items before he executes an investment.
First, he mostly focuses on value stocks. In more than six decades, he has avoid areas he has no much information about like growth stocks and cryptocurrencies.
Similarly, he always has a reason for executing an investment. In most cases, he buys companies he believes are extremely undervalued and those that have substantial returns potential. He also looks at companies that have a strong moat like Coca-Cola and Moody’s.
Further, Buffett believes in buying stocks when the conditions are right. For example, in 2022, he bought shares of Occidental Petroleum as the price of crude oil and natural gas surged.
Taken together, Buffett and other highly successful investors in the industry always have a good plan, which explains why they are successful.
Importance of goal planning
A trading plan is an important tool that will determine whether you are a successful trader or not. However, this needs to be defined by your goals to be truly effective.
The daily goal is obviously to generate profits, but that is not what we need to dwell on. Rather, we need to considert the path to our target and the benefits we can reap from it.
To set effective daily trading goals, consider your risk tolerance and aim for achievable targets. Focus on maintaining consistency and staying motivated by setting realistic profit targets, such as aiming for a specific percentage gain or a predetermined number of successful trades.
This approach will help you avoid over-trading and stay on track towards your long-term trading success.
The same thing as when we start our career as a trader. We should not focus on ‘I trade to make more money,’ but on choosing to pursue this career.
To be relevant, a trading goal (but any target in general) must be SMART: Specific, Measureable, Attainable, Relevant and Time-Based. Let’s see some of the important reasons to set trading goals.
Success in trading
First, a trading goal will help you become a more successful trader. As demonstrated by the Warren Buffett example, people who follow a systematic approach in trading are usually more successful than those who don’t.
Therefore, answering all those questions will help you achieve significant success as a trader.
Simplify your trading
Having a trading plan with right goals will help to simplify your trading process. This happens since you already have a systematic strategy to approach all kinds of markets.
As a result, you will have an easy process to decide on what to buy and what to short. Most importantly, you will not always be busy looking for a strategy that works.
Meanwhile, having a trading plan will help you stay focused in the market. Focus is a core part of trading since people who are more focused tend to be more successful.
For example, by answering the previous questions, you will be focused on key parts like what, how, why, and when.
If, on the other hand, you start your trading day without having a goal in mind (focus on a certain type of stock or specific news, make a number of trades..) you will waste your energy!
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Most importantly, having a good trading plan will help you achieve your trading goals. As a trader, your primary goal is to make a lot of returns on your investment.
At the same time, there are other external goals that play a role. Some of them are having a balanced lifestyle, improving your performance, and have more time to do your other passions.
Cons of having the wrong goals
A common challenge that many people have is that of setting unrealistic goals in their trading life. In most cases, this situation has numerous challenges. Here are some of the top reasons why you could fail in your trading process.
First, a common challenge among traders is that of setting unrealistic goals. For example, some people have a goal of growing their $10,000 account to $1 million within a month.
While this is possible, it is a relatively difficult thing to do. Indeed, even the most successful traders in the world have a challenge achieving that goal.
Having unrealistic goals will actually lead to substantial losses in the market. For example, to grow your account from $10,000 to $1 million, you will need to use a substantial amount of leverage. Further, you will need to open super-sized trades, which can be highly risky.
Another challenge of not having realistic goals is that it will push you to over-trading. Over-trading is a process where you open many trades in a given day.
While opening many trades can lead to substantial profits, it is also a high-risk process. In most cases, opening more trades usually exposes you to more losses than profits.
Stop improving yourself
Meanwhile, another con for setting unrealistic goal is that you will ultimately stop improving your trading process and journey.
And with the market constantly changing, stopping to study and learn (and fine-tune other strategies) can be lethal.
Examples of goals you should have
There are several examples of goals you should always have in the market. Here are some examples.
Update your trading journal
A trading journal is a document where you write all details about your trades. It can be a soft or hard copy document.
Some of the top details that you should have in your trading journal are: opening and closing price, reason for opening the trade, time of opening and closing, and the reason for exiting.
In most cases, the journal should answer the initial questions we looked at above. And it is not uncommon to forget to update it.
The other important reason you should have trading goals is that it will help you achieve a good work-life balance.
For example, a goal to trade for just four hours every day will mean that you have a substantial amount of free time to follow your passions and even spend more time with your family.
Maximum loss you can have
Another example of goal you can have is the maximum amount of loss that you can have per trade.
For example, you can have a goal of not losing more than 2% of your account balance per trade. Such a goal will help you achieve success as a trader.
Trading goals are an important part of the financial market. In most cases, people who succeed are those who have solid plans and goals and those who stick with them.
In this article, we have looked at the important concept of goals and how you can use them well in the market.
External useful resources
- What should a good trading plan consist of? – Quora