Before you start trading it's good time to review your beliefs about trading, the markets, what you feel is possible, what you believe to be probable and what you think is false.
Once you've thought these through, review your objectives. What exactly are you wanting to achieve? What are you good at? What skills or traits do you lack? What about your own personal risk tolerances?
The beliefs held by many of the world's great traders can be found in various texts, such as the Market Wizards series by Jack Schwager.
Here are beliefs held by some traders:
- The market only trends 30% of the time so a mean reversion system will do better most of the time.
- The big money is made in the big trends.
- Buying low beta stocks is a safe strategy.
- Understanding a company's fundamentals is the key to above average returns.
- The institutionalisation of the market has increased noise so I need to trade short term.
Your objectives are also very important in the design process.
In many instances I often hear, "I want to make as much money as possible".
Well, we all do.
But that's a very one dimensional view of the world and of the process of designing a trading strategy.
Indeed, there is much research to suggest extremely successful traders view profits as a by-product and not the main goal. Many successful traders are passionate about the markets and it's that passion, not the want of profits, that enable them to succeed.
Taking a more holistic view, objectives encompass many other dimensions, such as your personal risk tolerance and your lifestyle factors.
You may have found the Holy Grail system that generates a 70% annual return but you also note that it comes with a 50% drawdown. If you can only stomach a 10% decline in your capital then the end result is meaningless because chances are you'll never travel the journey to achieve it.
The same is true if you have a young family and have developed a scalping system that requires you to sit in front of a screen for 15-hours a day. It's probably not a realistic end game.
So your objectives must be broader than just profitability. They must be aligned with your beliefs. They must include realistic expectations and they must suit your lifestyle.
Realistic objectives may include:
- I work a full time job and have a busy family life. I need a simple strategy that takes minimal time to implement.
- I invest in property but I'd like to earn a second income for additional spending money.
- I'm happy to make 10% per year but really must protect my capital.
- I want to be in control and manage my own retirement savings.