BREAKING DOWN YOUR GOALS!
The way to achieve great results is to take an ambitious goal and break it down into small, achievable pieces.
When I give a seminar or address a group of traders, I sometimes ask the following question: “How many people in the room feel that a goal of a 100 percent annual return is an aggressive goal?”
Many people in the room will raise their hands at this point, because a 100 percent annual return does seem to be an ambitious target.
Then, I’ll follow up with this question: “How many people in the room feel that a goal of a consistent 6 percent monthly return is too aggressive?” The hands go down, as almost nobody in the room feels that this is an aggressive target.
The punch line is that the goals are one and the same. If a trader can increase
the value of the account by just 6 percent per month on a consistent basis, he or she will achieve an annual gain of about 100 percent. I know what some of you are thinking.
“Wait a minute—6 percent per month multiplied by 12 months per year equals a 72 percent return, not a 100 percent return! Ed has surely lost his mind—from all that loud music, no doubt!”
Perhaps, but don’t fit me for a straitjacket just yet. Whip out a calculator
and perform the following exercise:
Starting with a base number of 100 (the “account”), multiply by 1.06 (a 6 percent gain) to calculate your first month’s result (106).
Then multiply that result by 1.06, and keep doing this until you have calculated an entire year’s worth of results (12 months). You should end up with the following (note that some numbers are rounded, but this has no material effect on the results):
Month 1: 100 × 1.06 = 106.00
Month 2: 106 × 1.06 = 112.36
Month 3: 112.36 × 1.06 = 119.102
Month 4: 119.102 × 1.06 = 126.248
Month 5: 126.248 × 1.06 = 133.822
Month 6: 133.822 × 1.06 = 141.852
Month 7: 141.852 × 1.06 = 150.363
Month 8: 150.363 × 1.06 = 159.385
Month 9: 159.385 × 1.06 = 168.948
Month 10: 168.948 × 1.06 = 179.084
Month 11: 179.084 × 1.06 = 189.830
Month 12: 189.830 × 1.06 = 201.219
The account has climbed from a base of 100 to over 200 in one year, an annual gain of just over 100 percent. In order to replicate the results for different-sized trading accounts, add zeros to the base as necessary.
In other words, if the base were 1,000, or 10,000, or 100,000, the percentage
gains would remain the same. Because the gains are a consistent 6 percent, we are building off of a higher base every month. This is similar to the power of compounding.
CONSISTENCY IS THE KEY
This is not to suggest that a monthly gain of 6 percent is easy to achieve, but it does demonstrate the power of breaking our goals down into manageable targets. Consistency is the key; it is not that difficult to achieve a 6 percent return in any given month, but it is considerably harder to achieve a minimum 6 percent return every month.
We said at the outset that we’d start with a relatively easy target, and gradually work our way to the next plateau. Instead of starting out with a monthly goal of 6%, why not begin with a monthly goal of just 1 percent or 2 percent? A goal like this is unlikely to put much pressure on a trader, which is good—trading can be stressful enough without any additional pressure.
Achieving a goal of just 1 percent per month would put you well ahead of most traders, since the majority of traders lose money. While a goal of 2 percent per month may not sound awe inspiring, if we can achieve it consistently, the annual gain will be just shy of 27 percent—and you’ll have outperformed most mutual funds and hedge funds.
If you have successfully achieved your modest goal for three months in a row, raise the goal to the next plateau—from a 1 percent monthly goal to 2 percent, or from 2 percent to 3 percent, and so on. Don’t rush through this process; remember, as you gain experience and confidence, you will be a better trader in the future than you are now, and you’ll be better suited to
more aggressive goals.
Here is the breakdown of monthly goals and their annual equivalents (again, please note that some numbers are rounded, but this has no material effect on the results):
1 percent every month = 13 percent annual return
2 percent every month = 27 percent annual return
3 percent every month = 42 percent annual return
4 percent every month = 60 percent annual return
5 percent every month = 79 percent annual return
6 percent every month = 100 percent annual return
7 percent every month = 125 percent annual return
8 percent every month = 151 percent annual return
9 percent every month = 181 percent annual return
10 percent every month = 214 percent annual return
TAKE CONTROL OF YOUR TRADING DESTINY
By the time you work your way up to consistent monthly returns of 3 percent and then 4 percent, you’ll be putting up respectable numbers, and you’ll have gained the benefit of months of experience.
At this point, you’ll no longer be like that teenage driver with a learner’s permit; instead, you’ll be more like a driver who is comfortable and confident behind the wheel, in complete control of your vehicle, with the ability to anticipate trouble before it happens. You will have progressed to a higher plateau.
Of course, there will still be goals for which to strive. If you can achieve consistent monthly gains of 5 percent or 6 percent, you will have truly joined the elite.
At this point, you can continue to increase your goals, or perhaps you will have found your “comfort zone.” Remember, you don’t have to continually increase your goals if you don’t feel that you’re ready to do so—or if you just don’t want to. Your personal comfort with your goal
should also be a consideration.
WHAT HAPPENS WHEN I REACH MY GOAL?
Once you’ve achieved your goal, you don’t have to stop trading, but you can take precautions to safeguard your gains. In trading, we use a stop on every trade to limit losses and protect gains. Why not use that same philosophy to protect your monthly returns?
For instance, assume that a trader’s goal is a consistent monthly profit of 5 percent. After reaching this goal, she continues trading, and her gain for the month climbs to 10 percent.
The trader now calculates a “stop” for the entire account, at the point where the gain was equal to 5 percent. If the monthly gain falls back from 10 percent to 5 percent, she stops trading
for the month, and has still achieved her monthly goal. She can continue trading in a demo account for the remainder of the month.
What if you encounter problems and can’t meet your objective? If you are consistently failing to meet your goals, they may be too aggressive. Try for an easier target. If things get really tough, cease live trading and switch to a demo account until you regain your footing.
Some traders feel that demo trading is beneath them, but sometimes you have to sacrifice your
ego if you’re serious about making money as a trader. Don’t allow foolish pride to stand in the way of your long-term success.
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