Trading objectives are the goals you want to achieve through trading, such as putting your kids through college, buying a bigger house, or retiring earlier than you ever thought. In trading, you do not always have the type of market that works best for your system and you will inherently suffer draw downs that are not any fun. These goals and dreams are the fuel that keeps us focused on achieving our trading objectives. Anything worth doing takes work and time. The positive side of trading is if you absolutely love it then it won’t feel like work.
What are your personal trading objectives? Here are a few thoughts and questions to help you discover how to create your trading objectives.
What type of returns do you want to achieve?
This is a fun question. Most people will answer it by saying, “as much as possible!!!” this is not the answer that will help you with your trading objectives. It is important for you to think through this question. The more money you want to make the more time you will have to put in to trading. No one has found a way to magically multiply their money without taking time to do it, so remember this when you are thinking about the types of returns you want to achieve. For example, if you work fulltime and trade on the side then you will not have 8 hours a day to focus on trading and you need to set reasonable return goals. On the other hand if trading is what you do for a living then and you spend 8 hours a day working on it, then you should be able to set higher return goals.
Here is one of the best books to read about the master traders and the returns they achieved.
Trend Following, How Great Traders Make Millions In Up or Down Markets, by Michael W. Covel.
This book describes several trend followers and their performance history. This should give you an idea of what is achievable or at least what to shoot for when you are thinking about your trading objectives. The difference between what these traders are able to achieve and what you can achieve will be based on your time and willingness to learn.
The other big difference if whether you are managing a large pool of assets or a smaller personal pool of assets. The size of the asset base will absolutely change your ability to achieve higher returns. Your strategy will dictate what size will start to hamper your returns. If you are trading in very liquid instruments then the sky is the limit but if you trade low volume small cap stock, penny stocks, out of the money options, then you will need to make sure you know how much you can trade on each individual position before it starts affecting your returns. This leads us into the next question.
What type of securities do you want to trade?
There are really two questions you need to work through to help you answer this step. These two questions are how much money you have to trade and what amount of time you are willing to spend trading. The types of the securities you want to trade will hinge on the answers to these two questions.
Let’s start with how much money you have to trade. For those that have $5000 to $25,000 you are going to be limited to the types of strategies that you can use. The reason for this limitation is based on my belief that you should use position sizing with every strategy you trade. You should not risk more than 2% of your trading capital on any one trade, so for $5000 you could only risk $100 per trade.
This does not get you a cost effective position. Even at $25,000 you still can only risk $500 per trade, this works a lot better but is not ideal. So for this level of capital you need to focus on a longer term trading strategy using EFT or Mutual Funds to keep your trading cost down.
If you have $25,000 to $50,000 in trading capital this opens up a lot more strategies that can still be cost effective. You can now look into trading options, stocks and even futures. You still will need to be careful on the number of trades you take on a monthly or annual basis. Slippage and commissions can kill any trading strategy.
The sweet spot for most of you reading this information will be $50,000 to $100,000. This amount of capital should allow you to create just about any type of system that you want. The only limitation to this amount of money is the number of different trading systems that you can create. This amount of capital should allow you to trade two maybe three strategies.
Once you have $100,000 or more in trading capital then it becomes easier to have multiple trading strategies. The reason behind creating and trading more than one strategy is that inherent risk of trading strategies coming in and out of favor.
There will be website and blogs that say they can take $5000 and turn it into $50,000 or more. They probably can if you catch a good run and do not worry about position sizing. With any strategy like this your chances of ruin are much greater than your chances of growing your capital to $50,000. All of the information above is based on using some type of position sizing model.
Next is deciding how much time do you want to spend trading? Is your goal to do this 40 hours a week, just 30 minutes a day, or anywhere in between?
Day trading will require the most time. Day trading is just what it sounds like you are in and out of positions during the day. In order to execute the trades you will need to have time to watch the market throughout the day and access to a computer to execute the trades. This can be done without having to be in front of a computer all day but it will be hard and you will not have the same results as somebody that has the time to trade all day. If you did want to day trade but you did not have the time to sit in front of a computer all day you could work in the evening screening for your trades, position size and execute your trades in the morning and set trailing stops to execute during the day. Day trading strategies can use just about any type of security, so the sky is the limit when it comes to this strategy and your trading objectives.
Swing trading does not require as much of your time as day trading. Swing trading is similar to day trading strategies. You can create just about any type of swing trading strategy. This difference is the time you tend to hold your positions; this is typically 3 days to 3 months. The reason this takes less time is you will not be as worried about the inter day movement of the position. Swing trading is a personal favorite because it gives me more flexibility than long-term position trading but with less time demand of day trading. Swing trading is also going to be able to use just about any type of security when you trade.
Long-term position trading requires the least amount of time of these three strategies. Long-term position trading is just what it sounds like. You are positioning your securities for a long-term trade of between 3 months and several years. This strategy requires the least amount of time because you have large stops and triggers that do not have to be watched everyday and do not get triggered as often. The only limitation as far as the type of securities you can trade when it comes to this strategy is options and to a lesser extent futures. Both options and futures have a contract date which the option or future end either by expiring or requiring you to deliver the underlying security. You can trade these in a long-term position strategy but you will have to understand the cost of rolling the contracts. So in my opinion this strategy works best with stocks.
All three trading strategies will have a big impact on your trading objectives. Making the assumption that you have an equally good system for each strategy, day trading will make you the most money with swing trading next in line and long-term position trading behind both other strategies. This tends to have to do with the amount of trades that each system gets.
These three strategies are the basic type of trading strategies. There are many other types of strategies such as trading gaps, arbitrage spreads, scalping and so on. The strategy you choose will directly affect your trading objectives.
Other than returns, what personal goals do you want trading to accomplish for you?
Do you want to trade for a living? Are you going to only trade for yourself? Trading is a wonderful business that allows you to be your own boss and set your own schedule. It is not a business for the faint of heart or overly emotional trader. You will have to continually work on your Trading Psychology. Remember trading is not easy and the market is there to take as much money from you as possible. So set realistic goals and trading objectives. Don’t try to get rich overnight, it does not work. Most people selling trading systems are going to sell them by either appealing to your greed factor or fear factor. Try to stay away from the hype of huge returns. If you absolutely need to explore these types of systems start with the lowest amount possible or just paper trade. The good side of exploring all the different types of trading systems, is it will give you ideas of what you like and don’t like in a building your own trading system that fits your trading objectives.