When you ask traders why they want to be successful in trading, you’ll get answers like “I want to rich” or “I want to be able to provide for my family” or I want to retire early from my job” or “I want to buy a big house in a great neighborhood”. Is that really what you think trading is about?
To me, trading is the ability to leverage my time extracting money from the markets to allow me to be able to do other things I enjoy doing. It improves my freedom of choice. I can help others across a wide range of things from creating posts like this for other traders, donating to various charities, having the time to help my subdivision on landscaping design, helping elderly neighbors get stuff done and cooking meals for friends or charities. I have fun helping others. It’s satisfying. I do it for me, because I enjoy doing things like this and it gives me some purpose in life. I’m not one for sitting in a Lazy-Boy and watching TV.
My objective in trading is very different from many of you reading this. I really don’t need to have a 100+% return on my portfolio. I really don’t want to sit all day in front of a trading screen. I don’t want to sit there on a simulation platform and run 10,000 cases of every possible combination of 10 parameters to find the “perfect” way to have traded the last two years. I just want to keep on helping others, chat with friends, ponder where life is taking me and enjoy the ride.
My objective in trading is to take a minimal amount of time doing it. I want a positive return as often as the markets allow me to have it. Consistency helps keep me even-keeled. I have computer expertise, so I want to make use of the leverage that creates in my trading day. I know that position sizing is important, so I wrote a book on that for $10 electronic versions that might help other traders. I use the same concepts myself. I have a reasonably large portfolio, so I want to minimize the effect of any one market adversely affecting me and shoot for extreme diversification with hedges where appropriate. I want trading rules that are clear, precise, and leave no doubt as to what I should be doing at any moment. I want to think through distractions that might try to intrude on my day, plan what to do with them and eliminate stress and worry. I want to go through life with a smile on my face and the ability to lift the spirits of others. At the end of the day, I want to put my feet up, relax and know that today was a great day! Enjoy the ride everyone!
This is one of my favorite subjects about trading as it is part of the 12 ingredients of any trading system and most people skip the objectives completely, so thanks for bringing it up, Tom!
If you skip objectives, almost certainly the following will happen, sooner or later:
a) You trade a system that does not suit you, which means you will override it eventually
b) The system most likely does not do what you REALLY want it to be doing, so you really don’t know the system well.
Knowing what to expect from a system is key. Understanding when it is supposed to make money and when it is supposed to lose money is key. If you are in a drawdown and you understand why, you will be able to handle the drawdown.
1. The first part of objectives, what Tom speaks about, I like to call them “General system objectives”, is all about what your complete trading operation will look like according to who you are.
I have successfully mentored many people and without exception, all of them are different.
l personally know Tom and his systems quite well and Tom knows my systems very well as we both have compared notes on how we trade, we both understand the edges of our systems and why they are profitable, yet I do not want to trade like Tom, neither does Tom want to trade like me. (we do learn from each other though). The main reason is we are just different as a person, we have different personalities and prefer different styles. If we would swap systems and trade them, the chance of overriding the system would be very high because we’d be trading something that is just against our nature, just because it doesn’t suit our personality and preferences.
I write a lot about objectives and personalities in my book Automated Stock Trading Systems and provide complete systems that are very different in style but here’s some guidelines to follow;
Key questions to answer in the General systems objectives:
- What do you want from your trading?
- Why do you want to trade? Cashflow? Wealth accumulation, thrill, solving the puzzle?
- Risk;
o How much of a drawdown can you handle? (the lower the risk tolerance the lower your
expected return)
o What is your account size and what dollar value are you willing to lose?
Just imagine trading a 20k account or a 2 million account. Losing 50% on the 20k account would for many not be such a big deal but losing half of a 2 million account might change your thoughts to risk objective.
- Are you a trend follower who likes to be in positions for months and give back a lot of money when the trend bends, have a low win ratio but once in a while a huge asymmetrical trade that pays for all losers? Or are you more a contrarian and like to buy fear and sell greed (opposite of trend following) and be in a position on average for a few days and on average 60% of your trades are profitable but mainly small profits paired with a high frequency?
Note: there is no good or bad answer. both are good. However, combine them and your risk adjusted return even gets better. But what do YOU want?
- Do you like to watch the screen and your positions during the day and day trade or do you only want to trade 30 minutes a day placing your orders before the market open or maybe do you want to trade on full automation? Take a look at your personal situation, your lifestyle and preferences and you will find the answer.
- Do you want to trade stocks, forex, futures, crypto? Or maybe you want to trade them all? Part of this will depend on your preference but also on your account size.
2. The second part are the “single system objectives”. This is all about what price action in the market do you want to catch and in what way will you do that? The better you frame the question the easier is the answer and then you just look for an indicator that captures the entry when you want and the exit.
Let’s say you have defined that you want to be a trend follower, then think of the following questions you need to have answers for:
- What instruments will you trade and why?
- What liquidity do they need to have? If you trade a billion dollars you cannot trade many instruments versus somebody with a 1 million USDk account. So, here the low accounts have a big edge!
- Do you want to trade volatile or non-volatile instruments or do you not care and adjust your position sizing for volatility?
- Time frame: What kind of trend behavior do you want to catch? Only the big trends? Or do you want to be in early? Tom, for example has a fairly short lookback of entry and exits, around 20 to 40 days lookback, some systems even faster. Now take Ed Seykota who has a very long-term lookback back of 200 days. Both Tom and Ed have been featured in (new)market wizards and are highly successful though when Ed is long, maybe Tom is short already. So, there is NO magic number. What is your preference?
- What indicator will you use to define the entry and the exit. You just look something that measures a trend. The actual indicator as far less important than the timeframe you choose.
- How much will you risk per trade?
- What is the maximum number of open positions you will have?
- Do you want to scale out of a position when profits get too big, or shoot for the moon and trail it, hoping it continues to rise (while your position and volatility gets larger)?
What I have learned in 22 years of trading is that the more time you spend on objectives the more clarity you will have which will reduce your development and testing time by many hours. Also, you will be trading what really is in line with who you are which increases the odds for consistency and not overriding your system. Every hour spent on objectives is worth it!
Kind regards
Laurens Bensdorp
Tradingmasteryschool.com
Well said Tom. I am 66 , retired for 3+ yrs, and have tried every manner of trading. My life changed dramatically when I focused on trend trading with end of day signals. TY for your inspiration .