Link: What are Your Goals in Trading?

Jun 29, 2007: 11:28 AM CST

Stockbee posted a thought-provoking column entitled “What are Your Goals in Trading?” that addresses the age-old question, “Should I trade to be right or should I trade to make money?”

At first glance, and to many new traders, it would seem these two concepts are irrelevant because you make money when you are right… don’t you?  The true answer is “not always.” The corrolary would be “You don’t make money when you’re wrong…” but sometimes you do (with hedges or certain option strategies).

Some strategies don’t require market prediction at all (some of these include ‘delta neutral’ strategies or ‘technical decision node’ spread entry strategies).

Nevertheless, Pradeep offers some quick logic and thought-provoking questions for you to consider in your trading.  If you are trading to be right (perfect), my suggestion is to reconsider and see why this strategy is a failed (or impossible) one.

If you are trading to make money (aren’t we all?  Not necessarily), then let go of your psychological need to be right and focus on achieving consistency in your analysis and trade execution (and trade management).

Fighting the ‘need to be right’ is something I have battled for years and, honestly, still do.  I get hurt when my trades don’t work out and I have to use mental techniques to get me back in the right frame of mind after a large loss or series of smaller losses.  It hurts my pride, absolutely!  But I’ve learned that making money and analysis/prediction acccuracy are not necessarily the same thing.  In fact, letting go – as difficult as it is – has a comforting effect at times – try it for yourself, even if the exercise is a small one.

Check out the link and give yourself a serious gut-check this weekend if your profits aren’t what you feel they should be and try to return to the basics.

2 Comments

2 Responses to “Link: What are Your Goals in Trading?”

  1. ArizonaChartist Says:

    Hi Corey,

    This is what I had to say about this in my blog and I think it applies here;

    I feel the pnf methodology, or any other methodology for that matter, can work as long as it is married to a strict risk management discipline.

    Please allow me to illustrate. Let’s say that I have a system in which I always place exactly 2% of my capital into a position and I risk no more than a 5% loss on any one position. Now let’s say I place 100 positions over the course of a year and I am wrong on all of them. Having been proven wrong I get stopped out with exactly a 5% loss on the money invested in each of them. In this hypothetical scenario I will suffer a 10% drawdown. After a 10% loss it takes a gain of only 11% to get back to breakeven. The actual loss for the year will in reality be slightly less than 10% of my starting capital. But I’ve made some simplifying assumptions such as ignoring that as the year progresses my starting capital will decrease a bit due to small losses incurred earlier in the year so the 2% invested in each position represents a slightly smaller number as the calendar advances. Also I’m assuming away any interest earned on cash that is waiting to be recycled into new positions.

    I don’t need a backtest to tell me that if I put on 100 positions in a year and I use a disciplined position sizing and risk management strategy the maximum drawdown over any given 12 month period is going to be something from which I can recover within reason. And while it is highly improbable that I will get stopped out with a small loss on 100 consecutive positions I must concede that it is not impossible. I like to say that in investing I must keep the math on my side. The example I stepped through illustrates the point I’m attempting to make.

    Note: To add to the last sentence, another point being made is that I can survive being consecutively wrong a rather large number of times, again as long as I maintain a disciplined position sizing and risk management strategy.

  2. Corey Says:

    I agree completely, and am thankful for your post.

    I failed to mention this above not only in this post, but in the post where I linked to the Position Sizing spreadsheets.

    Not only do we not “have” to be correct on most of our trades, but our strategies for trade entry and exit are part of a broader concept of our trading system and expectancy. Taken a step further, you are absolutely right in that consistency in risk management, position sizing, and a positive expectancy (having exit profit targets always be larger than stop-loss targets) produces a reduced-stress method that eliminates the psychological need to be right.

    The caveat is that developing such a system can take years for a particular retail trader. Most people enter the world of trading thinking they can just pick stocks (or worse, hear news on TV and pick stocks) and be ok. Trade entry and exit – what most people focus on so deeply – is only a small component, and many professionals argue it is almost a negligible component compared to position sizing, risk management, and money management (as well as consistency in applying a proven method).

    The numbers, and the math, do play out when given the chance. Trading is – at its core – about probability and structure. My fear is that most new traders never make it to this realization, or if they do, they give it ‘lip-service’ until it is too late and they walk away discouraged.

    I always appreciate your comments and am thankful for your insight here.