Trading psychology: the number one goal-setting mistake traders make in trading
The number one goal-setting mistake traders make is setting money-related goals. Active traders will often tell me that they are aiming to earn X dollars a day or X points a day. That is not a good way to structure a goal.
Money-related business goals
What happens when the market is trading in a very tight range? Normally, the price movement will remain within the range of the first hour throughout the day. That range could be only 5 or 6 points, too narrow to offer many trading opportunities. It is very difficult to make money on such tight days.
So if your goal was to earn X dollars a day, how do you do it on a tight range day? Since it is almost impossible to do good trades on such a day, you would not have achieved your goal. And, if you couldn’t read that the market has narrowed your range and instead tried to hit your money target, you probably would have been trying to trade every little turn and ended up trading on a choppy, range-bound day. At best, his money goal had set him up for failure because he couldn’t achieve it. Worse still, your money target caused you to force trades in a choppy market and perhaps you lost money. Goals that promote failure, bad business habits, and losses are not useful goals.
A better business goal
A better goal is focused on your development as a merchant. It will help you improve your business knowledge, skills or abilities. Instead of thinking about money, think about the negotiation process. The trading process simply refers to the skillful actions that a trader takes to trade effectively. A useful question to ask is:
What business process, if I improved and developed in this area, would increase my ability as a merchant?
Example of a better business objective
An example will help illustrate how to do this. Let’s say you want to improve your proficiency in business trends. You have performed a self-assessment of your trades on trend days and find that your biggest limitation is that you tend to counteract the trading trend. A simple solution could be to notice if the market is moving with momentum and making higher lows and highs (for an uptrend). So a useful process objective becomes:
Before I take a trade that fades a move, I will assess whether the market is moving with momentum and making higher highs and lows. If it’s trending, I won’t accept the trade. I will run this process on at least 85% of all trades considered during the next 20 business days.
Note that this objective is useful because it develops skills and ability to assess the market movement. It also prevents the merchant from doing poor quality trades. The next step for this trader would be to develop a goal to execute trades consistent with the trend, again a process goal.
Business goals should be designed to help you achieve it. Goals related to money, points, or other ‘stats’ won’t help you achieve it. Work on business goals that are related to achievement by helping you develop your business skills.
