When you begin trading, there are a lot of questions. With all the information out there it can be hard to decide where to start. Setting goals can help, but often novice traders set the wrong type of goals. As a novice trader your initial goals should help you eventually make money, but making money should not be your goal. Instead, opt to make your initial goals about the process and emulating traits of professional traders.
- Traders new to the world of finance can benefit greatly from setting specific goals for themselves that they hope to accomplish in a set period of time, rather than focusing on a specific dollar amount.
- Focusing on the process of trading, including strategies and structures you've set in place for yourself, regardless of results, can be more effective than giving up on a strategy too soon.
- All trades a novice trader makes should be the result of a well-thought-out plan that includes how trades will be entered and exited and how the money will be managed.
- Part of being prepared, knowledgeable, and strategic as a trader involves knowing when not to trade, when to sit it out, and when to wait for a better opportunity.
- Avoiding needless complexities in favor of a simple, straightforward plan is usually best, particularly for trading neophytes.
Make Your Goals About Process, Not Results
Initially, traders want to make goals about numbers: "I will make 1% per day on my $30,000 capital," or "I will make 30% per year." While it seems simple, to actually get to a certain percentage or to reach dollar targets, you will need to refine your market approach and hone your discipline. By plunging into the market and expecting to make a certain amount of money, the goal becomes almost impossible to reach over the long term. These types of goals require the trader to truly understand the capabilities (and limitations) of the trading plan they are employing, not just think they understand.
Based on the method being used, it may be impossible to reach a dollar or percentage goal, but it still could be valid and provide a good return. Therefore, the trader must either abandon the strategy or deviate from it in an attempt to find more yields. For many traders, this becomes an endless cycle of abandoning strategy after strategy. Looking at charts in hindsight makes trading look easy, but those who trade know it is harder than it looks. Novice traders must not only become knowledgeable about the markets, but also about themselves.
Just like any other business, to become a good trader you must focus on a solid process. Results will not come instantly. Most businesses require quite a bit of time before profits are made, and many businesses fail completely. Trading is no different. Without understanding how the markets truly work and developing a winning process, the results are based on chance, not skill.
To build a winning process for trading the markets, try using these three goals.
Always Have a Plan
In business school, you are taught that to start a business you need a business plan. Trading is a business. Therefore, every time you trade you must be trading according to a well-thought-out and calculated plan.
The plan should include how trades will be entered and exited and how money will be managed. The plan should be very detailed, outlining the markets that will be traded, risk parameters, if filters will be used on trade signals, what constitutes a trade and exit signal, position size, what market environments will be traded, and how that will be determined, such as ranges or trends.
Therefore, the goal here is to create a complete plan before making another trade.
Learn Not to Trade
Especially when a specific dollar amount is the goal, traders will push to achieve that goal, even when opportunities are not present. The market does not present statistically probable trading opportunities at all times, often you will be far better off sitting on your hands or watching TV than trading. This does not sit well with most people; they want to continually be doing something. In the markets, this can slowly (or quickly) erode the profits that came during good trading times.
Trading during slow times or making impulsive trades outside the scope of the plan is such a common issue that it deserves special attention. Make one of your goals to be as disciplined as possible, only making trades that are outlined in the plan.
Keep It Simple
A complex strategy can be very alluring. Many people believe because something is complex it is more likely to work. Avoid getting too fancy with your analysis and trading strategies or making a winning trading plan more complex—usually this only results in destroying the profitability of it. If you like the stock market, stick with trading stocks. If you like currencies, then trade FOREX. Focus on only one market and a couple of simple strategies when starting out.
The goal here is to avoid constant tinkering to improve performance, or continuously switching markets, strategies, or analysis methods. Stick to the plan. If it occasionally needs to be reworked a bit that is fine, but keep the revisions simple and avoid getting overly complex.
The Bottom Line
When starting out, be a niche trader focused on a few manageable goals. Results will come in time if you are trading according to a trading plan, not trading when there are no opportunities, and avoiding getting too complex.
Investopedia does not provide tax, investment, or financial services and advice. The information is presented without consideration of the investment objectives, risk tolerance, or financial circumstances of any specific investor and might not be suitable for all investors. Investing involves risk, including the possible loss of principal.