Is setting goals a bad idea?
A lot of people think so.
But it's not important what people think; it's important what actually works. So let's look at it.
Setting goals can be the greatest thing to happen in our lives. For example, Penn Jillette didn't like where he was in his life, so he recently set an audacious goal of losing one hundred pounds in four months--and he did it! And then wrote a book about it. That was a life-changing event for him, and it started with a very specific goal.
Back in my teaching days, I had two young, outstanding tennis students. Several months before one of them was even in high school, I planted a goal in their heads about both of them winning the state championship on the same day. Such a thing had never been done before in Ohio history (or since). Severalmonths later, they were both holding championship trophies. In that case, a specific goal also worked very well.
Goals can provide clarity. The universe is always saying "yes", but the universe can't answer vague requests. "I want to be better" is not a goal. How do we know we're "better"? We could have less money a year from now but be happier. Is that better? The greatest tennis player of all time could have a lower ranking after six months of rest but be healthier and stronger. Is that better? It's hard to say. And if it's hard to say, then nothing has really happened.
Specific goals change that. Saying "I want to be ten pounds lighter" or "I want to run a sub six-minute mile" or "I want to be able to do five pull-ups" is specific. Those types of goals are measurable, so they inspire action. And when the goal is achieved, it can add a lot of meaning to our lives.
So why are smart people against goal setting?
They're against it because goals can also make your life go nowhere, or even backwards. How? If a goal is unreasonable, our inevitable lack of accomplishment feels like failure.
For example, let's say we set a goal of making $100,000 in a month. That's specific and life-changing if accomplished. That's a good goal--on paper.
But what if we currently make $2,000 a month? How do we get from $2k to $100k? That seems hard. Really hard. So hard, in fact, that...why even bother? Maybe the best we could do in the short term is make another $500 a month. That's actually a great accomplishment, but it feels like garbage because we stated our "goal" as being $99,500 higher than that.
The result? We stop working on our goal, feel like losers, and lose motivation. Because of that, maybe our doldrums cause us to start making only $1,700 a month. Making less then makes us even less motivated, and down the spiral we go.
A specific goal that's unreasonable can actually make our lives worse.
So how do we fix that? We make audacious goals, but make them achievable. Then, after achieving that goal, we make another reachable goal. And so on.
Then our lives become a series of successes.
When it comes to trading, it's easy to get caught up in dreams of unlimited riches. Because anyone can catch that one big trade at any time, it's easy to dream of making the million dollar windfall and go from a regular job to living on a private island.
If the big success doesn't happen right away, though, it's easy to feel depressed and think, "Maybe this trading stuff isn't for me after all."
But we already know the solution: we make spectacular, reachable goals. So what is a spectacular, reachable trading goal?
Well, let's take a look at a ranking of the top 40 best fund managers on the planet.
I like to look at this top 40 list for a few reasons. One, I like using it because this list contains some of the greatest traders of all time (who are still trading). Two, I like this ranking because almost all of these managers are 100% automated.
If you look at the ranking of the top ten managers over the past year, the average return of some of the best traders on earth was 14.9%. Some did better, some did worse, but the average of the top ten managers was 14.9% (just for reference, the S&P 500 made 12.0% in the past twelve months).
And if you look at the drawdown incurred by the top ten managers over the past year, the average drawdown was 4.35%.
However, to get a better look at a realistic drawdown figure, I added in the the 12-month average drawdown of the managers ranked from #31 to #40. If we add those ten in, the average max drawdown moves to 7.99%.
There's a good benchmark. To be among the best in the world, we could shoot for a twelve-month return 14% per year, with max drawdown about 8%.
Is that possible?
Let's examine my Breakout robots for our hypothetical comparison. I chose the Breakout system because it's incredibly easy to run this "portfolio" of just two robots. There is hardly any work at all for a person who wanted to trade this way, whether she is a discretionary trader or an automated trader. On Daily charts, there just isn't that much to do.
If we traded just these two robots, we would have made $3,882 on a hypothetical $10,000 account in the past year. That's a 38.8% return. How about the drawdown? The month-end max drawdown for the past twelve months was $1,162, or 11.6%.
Now that's a bigger drawdown, but it's also almost three times the return!
To make this apples to apples, I divided my hypothetical trade size by 3. When I did that, the Breakout robots made 12.9% with a max month-end drawdown of 3.9%.
When you compare the Breakout numbers to the previous 14.9% return, 7.99% drawdown numbers, this simple, boring Breakout robot duo is on par with some of the best fund managers in the world.
Knowing this could help goal-setting. First, we could say that we want to be as good as some of the best fund managers in the world (good, but vague). Then we could shoot for the same numbers that the top guys get, which as it turns out, is possible
That's one way to make trading goals motivational and achievable.
This is not to discourage anyone from having preposterous goals. I love preposterous goals. If you're the type of person who never gets down, lofty goals can be a great weapon for you.
But most people don't function like that. If you're not relentlessly positive, make sure you're not getting depressed if you don't reach unsubstantiated, unrealistic goals.
Almost anything can be accomplished if we keep going. Having researched, reachable goals will keep us happily always moving in the right direction.