Money is Always the Reason
Gaining Clarity on Your Trading Goals
Risks and Goals
What’s your goal in trading? I mean specifically. What are you trying to achieve? Money is almost always the reason, but what’s your number?
An extra £2kpm?
These are all very different outcomes and require a different plan of attack.
Then you need to consider your risk tolerance. Are you willing to risk 50% of your trading capital? 100%, 5%? It makes a difference. How long have you got? 1 year, 10 years, as long as needed?
Why is this important?
Your goal and timeline determine a few things:
- Risk allocation
If you’ve got a £1m account and are looking to make £100k per year then you can reduce your margin, spread your risk, and consider a slower, less aggressive strategy that preserves your capital.
If you’ve got £10k and you want to turn it into £1m in 5 years then you are going to need aggression and high-risk strategies…
The odds of complete loss are high, but perhaps you are happy to make that pay off for a chance at the prize.
Bigger risk per trade, adding to plays, using full leverage, and trading the instruments with the highest volatility are all things you’ll need to consider to make big returns.
The two approaches are very different. There’s no right or wrong. The odds of making £100k on a £1m account are much better than turning £10k into £1m. But maybe you don’t have £1m and maybe the idea of making £1k in a year from your £10k account doesn’t seem that appealing… On the flip side, perhaps losing your whole account in pursuit of big returns seems unpalatable too.
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Maybe there’s a middle ground? My point is this. Clarify your vision and then work backwards.
- Where are you headed?
- What strategy best suits that goal?
- What risk management parameters will you need?
- What sort of drawdown should you reasonably expect?
This is important to keep you focused and not derailed from the mission. If you’re going for the moon shot then taking a huge hit on a trade shouldn’t surprise you one bit. (After all, you dialled up the risk to give yourself a shot.)
For most traders, the answer probably lies in the middle. You might have a fair account size that you can afford to lose but don’t particularly want to. And you’re probably not doing this for a few extra % over the base rate either! So you find a middle ground.
- What’s a reasonable return? (Bearing in mind as you improve, so should your returns)
- How much risk do you reasonably need to take to get there?
- Is that palatable for you?
Now you might look at that number and come up a bit short.
IE: You want a bigger return than the risk accommodates.
So here’s one possible way to get around that: Trade two accounts in a different manner.
One smaller account that’s very high risk. Big position sizes, adding, trading volatile instruments. High risk of ruin.
Your other account has more capital but you trade it in a more modest manner, less risk, smaller positions, etc.
That might be a reasonable solution to the conundrum that many traders face. Wanting the chance of big returns but are uncomfortable with taking massive hits.
Of course, there’s no magic formula. I’m not a financial advisor and you certainly should ignore anything I say when it comes to your own money-based decisions!
But gaining clarity on your trading goals is an important task. Know where you are headed and what needs to be done to get there.