2. Self Assessment
Setting goals and evaluating motives gives a realistic picture of what a trader wants to do. It is widely known that people with goals have a higher percentage of success than those without them. But this is by no means an easy task since it demands a very honest and focused response from the trader, specially as to what a trader can do. Therefore, in this section, we will focus on settings goals while conducting an assessment about traders' motives and conditions. This will help the person develop and improve as a trader as well.
First, you must be specific with your monetary goals and write down how much money you expect to make from trading. These goals will allow you to operate in a much more business-like manner (expected profit potential per trade, risk control, etc.). Just as with any business, there are many things to consider before starting up.
It is possible to experience above-average returns trading Forex. However, it is difficult to do it without taking on above-average risk. So what is a realistic return to shoot for in your first year as a trader – 50%, 100%, 200%? Or perhaps the goal should be to not lose money in the first year? We suggest that if you never attempted to break-even it is a very doable goal. Break-even, that is 0%, is not so flashy as above-average returns, but it is much more realistic as a return for a rookie year in the markets. In fact, if you are able to achieve it, you are already better off than the majority! Below you can see a typical equity curve during the first decade of a currency trader:
Once your equity curve takes off, periodical monetary goals should be set accordingly. These can comprise quarterly, monthly, and weekly goals. Even daily goals are needed if you're trading intraday.
The goals can be set in number of pips or as percentages of equity; it greatly depends on the money management technique you are using. It is not the same trading a Fixed Lot model or a Fixed ratio (see Chapter C03).
Take the time to formulate questions and write down the answers to each of them and you will have a much higher chance of success than those who avoid this task. For a complete list of questions, you can always refer to the template from the Practice Chapter D.
It is imperative that you have clear goals in mind as to what you would like to achieve, but at the same time you have to be sure that your trading method is capable of achieving these goals.
Start by establishing monetary goals on a larger scale, let's say, one year or six months. Then think what you have to accomplish each month to get there, and, furthermore, what has to be done each week to reach the monthly goal. Do the same for the daily goals, if pertinent, and then assess if the daily goals still seem realistic after this scaling down. Finally, just by keeping track of your daily and weekly goals you can know if you are moving towards achieving your yearly goals.
If you start by looking to the end goal and working backwards you will figure out what type of plan you need to get there. Besides, having smaller objectives to meet along the way will help to accomplish the bigger ones step by step. Be flexible here as one week will be different from the next, depending on a myriad of conditions relative to your trading strategy and the markets. Finding a statistical average would be sufficient. Remember, a plan is more of a guideline rather than a rule.
Motives And Achievements
Once you list out how much money you want to make from trading, write down what you plan to do with that money. Goals are not purely financial goals. You may want to keep investing in education and become a strategist for a major broker/dealer, for example. In general, motives for wanting to trade can be any number of things: early retirement, extra income, extra time, diversifying your business activities...And the true is that when a trader improves, so will the financial goals.
Most people approach the markets because of the gambling aspect to trading or the potential gains. But if financial gain is your sole driver, then you are likely to be an early victim of greed and fear. The nagging desperation to make gains forces the trader to make mistakes like entering the market at the wrong time, taking profits too quickly, never allowing profits to run effectively, over trading and so on.
Those who are primarily driven by the desire to get rich become overwhelmed by their emotions and most often fall prey to the psychological pressures of trading activity. In general, most of us want always a little more more money and that's is why it is so important to clearly define the motivations behind the monetary goals: it helps disconnect from greed and fear.
Again, much like in any other business you need a mission statement which defines your motivation and driver in getting into this activity. Jay Lakhani explained during a webinar session the importance to have a mission in the trading business:
If you don’t have the answer to why you want to become a trader yet, then please, begin thinking seriously on this topic right now because it is way more important to any trader’s success than you first think.
Your achievements do not necessarily have to be money-related. A valuable short-term achievement may be, for example, to learn the ins and outs of the RSI indicator, or study a certain intermarket relationship, or even forwardtest a specific strategy for the next 3 months. Write down your achievements for the next six months, one year or any other time period.
Think in these terms: several months or years from now, what will you have to show for that you are doing right now? If your answer is vague or you don't know it, perhaps you should consider thinking about it and writing it down.
Define your own future and shape your life according to your own particular set of priorities and principles and you will be rewarded for that. Don't let other people define your future or let it in the hands of chance. In the end, you’ll be the one wasting your own life if you don’t accomplish any goals that you find worthwhile.
Beliefs About Money
The realization of what money means for you will provide you hints about what really matters to you in your life. It will also be indicative of the way you expect to make money. It is not the same if you see it as something proportionally related to effort, to skill, or to opportunity. The ideas you hold about money and the material side of life will also reveal if you consider yourself as deserving to make money or not. The sooner you confront yourself with these issues, the less barriers you will find along the way. Believe it or not, but this is something vital to your trading career since you are dealing with money on a daily basis. Money will be your instrument, so you had better be aware of what beliefs you hold about it!
Take the time to write down your ideas and to dig into your subconscious in the search for your true personality in money-related issues.
Conditioned By Previous Experiences
It is frequent to see aspiring traders testing the waters with real money and experimenting serious losses. Is a big loss still fresh in your memory and causing you to feel pain or seek revenge? Or maybe a margin call? A negative feeling may also be caused by money lost through a money manager who didn't managed your account well, and you may want to understand how it could happen. There is a myriad of first experiences that impact our view of the market. They can be negative but also positive. Did you know that many newcomers have exceptional winning periods before they realize the complexity of trading? This is actually a phenomenon explained by Mark Douglas in his book “Trading In The Zone”. He points out that the initial naivete of traders makes them fearless. In a fearless state people actually trade much better, even though they have less objective knowledge about the market and how to approach it.
In fact, many individuals with tremendous amounts of knowledge about the market still can't make money as traders. The majority of the time the explanation lies in the belief system of the individual. Therefore, make it a priority to question yourself on these issues and persist in doing it.
Many voices suggest that trading has a reasonably high failure rate. So why do you think you are going to be better off then most people? If you have certain attributes or know-how that you believe separate you from most of the other players, write them down as well.
Concerning acquired knowledge, what are you best at doing? Is it technical analysis or a particular application of it? Is it intermarket relationships where you thrive best? Statistics may also be your forte, and since not many people know how to use them, you can have an edge over most traders!
As for an edge based on a personal attribute it can be simply the determination and the commitment to carry out the task at hand- not many people will follow what is written here. In fact, by taking notes of all the aspects mentioned above you are already separating yourself from the majority. Well done if this is the case!
It is not easy to find special qualities that will provide us with an added edge. One way to do it is by thinking about your background and past experiences to see if you have something extra. It does not necessarily have to do with finances. Did you know that many analysts and traders arrived from areas where the visual detection of recurrent patterns is a requirement, such as art, film or photography? Engineers and people with a mechanical background in mechanics, for example, are usually strong system developers and programmers.
Discover if it was your entrepreneurial skills, your analytical skills, your capacity to manage money, or any other strengths which brought you to Forex and leverage them by shaping those skills.
In this context, it is strongly recommended to research and understand not only which attributes the markets reward but also which ones the market punishes. The important thing is to avoid both underestimating and overestimating what you are really capable of and thus losing touch with reality. If you feel overwhelmed by this task, try to research and examine yourself by taking psychological tests. There are many questionnaires on the Internet to find your own strengths and weaknesses.
Part of the proposed self assessment is about addressing your weaknesses. Having a weakness in a specific area does not mean this way is blocked for you. If you don not understand statistics, for example, ask yourself what you can do to become stronger in this area. Establish a goal to enhance your proficiency in it.
Write down your own weaknesses the same way you did your strengths, considering areas like your discipline, self-confidence, motivation, patience, organizational skills, computer knowledge, mental agility, and your ability to commit to the task of building a trading Plan.
No one likes to evaluate his or her weaknesses, but it is a necessary evil and a decisive step towards gaining self-knowledge. You are the one to implement your plan so the decision is entirely yours if you commit to this task or opt not to. Some parts of the plan can be turned over to a third party, but not the awareness of one's true self.
Knowing what sort of trader we are is a complex topic and for this reason there is an entire chapter (http://www.fxstreet.com/education/learning-center/unit-4/chapter-1/stubborn-beliefs/) covering it.
From a psychological point of view, each type of trader responds to different sets of beliefs which themselves condition how we deal with randomness; how we deal with failure and success; what idea we hold about discipline; what cognitive bias affect our trading, and many other aspects.
Building your profile is a life-long task, but it requires to be tackled from the very beginning. If you are still struggling at making profits from trading, then consider the possibility that it is not because you lack technical knowledge but perhaps because you are simply trading in a way which is not in sync with your personality.
In more practical terms, different profiles also point to different levels of commitment such as time and money. A swing or a position trader will need less time to follow the market than a day trader, but more money (or less leverage) because of large adverse movements in price. In addition, a trader can have different levels of discretion or automation which translates into the amount of time dedicated to watching the market or on programming and testing.