Goals & Objectives in Trading

Why are goals and objectives important for your trading?

Setting goals gives you direction and helps to organize your time and your resources so that you can achieve what you set out to do. In this blog post I will show 3 different results of a trading or investing approach and how different they are. If one has not answered the question of what their goals are, it will be very difficult to stick with any method.

This is only an illustration and not meant to be a trading plan. One needs to answer many more questions before embarking on a trading journey in order to make the path to consistently profitable trading an easier one.

The 3 approaches will use a starting equity of $25,000 in August 2007 showing 10 years of history and covering various market types — bull, bear and flat. It is easy for certain strategies to perform in bull markets for example, but when there is a flat or bear market how will it perform? And more importantly how will you identify at the time what the market type is. Hindsight is always great!

Scenario 1 — Buy and Hold Amazon

Approach 1 is to buy and hold (B&H) a single stock and I have chosen Amazon as I know it has been a good performing stock. The performance of this approach has been excellent from an annual return point view, returning ±30% p.a. To achieve that result one would have had to endure a 65% drawdown (DD)! This approach could also hold a portfolio of stocks instead of just one in which case the equity curve / DD profile will change.

The goals for this kind of approach would be: (not a comprehensive list)

  • A passive investment where one is willing to “forget” about the monthly / yearly ups and downs
  • Build long term wealth
  • Able to endure large DD’s and have confidence in the ability for the stock (or portfolio) to recover
  • Confidence in one’s ability to “pick” the correct stock/s. I have chosen Amazon for this illustration knowing that it has been a good performer. Would I have known that at the time or how much knowledge or expertise do I have to be a good “stock picker”
  • Below is the equity curve and DD of buying $25,000 of AMZN shares at the start date (ending July 2017). Pretty impressive return, it also comes with a pretty impressive DD
AMZN Equity Curve & DD Profile

Scenario 2— Buy and Hold an index ETF

For this illustration I have chosen SPY as the ETF (tracks the S&P500). The annual return of this approach is 5.46% with a 56.48% DD. Changing the start date of this would dramatically change the return, I chose to use at least 10 years of history and cover varying market types. The bottom line is, the scenario that happened in 2008 can happen at any time so cherry picking dates is not a wise thing to do.

The goals for this kind of approach would be:

  • Passive investment
  • Diversification by tracking a large number of stocks, in this case ±500
  • Able to endure large DD’s and the monthly / annual swings of the market
  • Not enough confidence to pick stocks oneself
  • Try and outperform a money manager. This would require more homework to define “outperform”
  • Retirement Funds
  • Below is the equity curve and DD of buying $25,000 of SPY shares at the start date (ending July 2017). Not great, it could however meet your goals and objectives if you do not want to be an investor but would like to have stock market exposure without buying into a fund (money manager)

Scenario 3 — Trading

For this illustration I have chosen an ETF strategy that I trade. It trades various leveraged ETF’s in the U.S. and ETF’s in other major stock markets around the world. The annual return of this approach (it can be replaced with any trading strategy) is 22.69% with a DD of 22.71%. The exposure is less than 15%, meaning it is only invested ±15% of the time, the rest of the time in cash.

The goals for this kind of approach would be:

  • Active trading. To me “active” means trading off of end of day prices, I do not trade intraday
  • Systematic approach; all decisions are rule based with no discretion
  • Max DD should be something that is thought of before starting to trade. In other words “Do I think I can endure a ±20% DD?”. Make sure of this or it becomes very easy to give up on the strategy in times of DD. We all have different risk tolerances
  • Confident in using leverage. This particular strategy uses 2:1 leverage (very low) although with 15% exposure it is hardly ever used. This is assuming a “cash” account, I do not use CFD’s or the like. The type of account to use will also be part of your planning
  • Confidence to trade 2 or 3X leveraged ETF’s. Leveraged ETF’s are not for everyone
  • Leverage of funds — Because the exposure is low, there is a possibility to use the same funds to trade another strategy alongside this one. This would be done to increase returns, which does not necessarily come with increased DD. Using a strategy that is not correlated to this one may reduce the DD’s or time in DD
  • Below is the equity curve and DD of the ETF trading strategy, start date (ending July 2017). Although the return is not as high as Scenario 1, the DD is not as high. The equity curve is also a lot smoother which makes it easier to trade (depending on your goals/objectives of course)

Conclusion: Which one would you choose? The simple answer is “The one that meets your goals and objectives”. There is no right or wrong answer on which approach to use, one thing is for sure though, without clearly defined goals and objectives for your trading / investing, any approach will be difficult.

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Good trading.

Any questions? Contact me:

Miguel — TravelingTrendTrader

Email: Miguel@TraderMig.com

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