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Thursday, December 29, 2016

Goal Setting for Traders and Investors — You’re Doing It Wrong
Feature Article
Goal Setting for Traders and Investors — You’re Doing It Wrong
by D. R. Barton, Jr.

“…Proportion of people who successfully complete a New Year’s Resolution: 8%.”

—University of Scranton study published in Journal of Clinical Psychology

With the New Year coming fast upon us, I’ve been motivated to write a series on a very important topic: goal setting.

The good news: when properly done, goal setting is a powerful tool.

The bad news: You’re doing it wrong.

Most likely.

Recently, the most comprehensive study I’ve seen on New Year’s resolutions was conducted by the University of Scranton and published in the prestigious Journal of Clinical Psychology.

New Year’s Day is a big deal. It’s the most celebrated holiday in the world. And in the U.S., more people make New Year’s resolutions (45%) than watch the Super Bowl (~33%).

But as we saw in our opening quote, we’re pretty lousy at keeping them. Only 8% of people who make resolutions successfully complete one.

So, as a society, our goal setting prowess can stand a bit of an upgrade. Over the next few weeks, I’m going to share what I consider some of the best work being done on goal setting.

We’ll bust some myths. (Ever heard about that famous Yale study on goal setting? Stay tuned for full disclosure in an upcoming article…)

We’ll spark some controversy.

And when we’re done, you might just have some of the best thinking on goal setting for traders and investors to use as a foundation for your planning in the New Year. A bold statement, but it’s a journey worth taking! Let’s get started…

We’ve all heard about the importance of goal setting. I helped write a very insightful chapter in Van’s book Financial-Freedom Through Electronic Day Trading more than 15 years ago. In working with thousands of traders, from those who are brand new to former floor traders, I’ve found that most do goal setting for their trading wrong! In fact, there’s a growing body of work that shows that goal setting done the wrong way, especially stretch goals, may be counter-productive (see, for example, Goals Gone Wild, by Ordonez, et al, a 2009 report from the Harvard Business School).

Goal setting is not a cure-all. And in trading it can be downright harmful if done poorly. In this section, I’m going to give you some guidelines for how to set goals at every step of your trading journey – and since I developed this particular approach to goal setting, chances are that this is the first time you will have seen this useful and easy method. And the good news is that this approach takes much of the anxiety out of early goal setting and allows you to learn the art and science of trading in a low-stress way!

So let’s look at the two classic ways to set goals. There is an ongoing controversy over which way is best. Below, we’ll settle this age old controversy and provide some guidelines for how traders (whether you’re new or a seasoned veteran) can learn fastest by combining the two methods.

Every great debate must have two strong, compelling and competing view-points. Just think of the great debates of our generation:

Nature vs. Nurture: Which plays the most important role in a person’s success or failure — is it their genes or how they were raised?
Privatized Social Security vs. Government Invested Social Security: Should we allow citizens to direct the investment decisions for their tax-sponsored retirement savings or not?
Tastes Great vs. Less Filling: Okay, this debate has two problems. First, Miller has largely abandoned this hugely popular ad campaign. And secondly, every light beer out there (including Miller’s anemic entry) tastes lousy.

But this brings us to this week’s topic, and a serious one it is. How should traders and investors go about goal setting?

And indeed there is a controversy here. Instead of nature versus nurture, we have results-oriented goals versus process-oriented goals. And for traders and investors the differences are important.

If You Don’t Have a Dream, How You Gonna Have a Dream Come True?

Let’s start our discussion on goal setting for traders and investors with three simple words:

Make written goals!

If you don’t have trading and investing goals, chances are high that you’re setting yourself up for failure. And if your trading and investing goals aren’t written down (and reviewed regularly), then you have a much lower probability of achieving them.

I may do a whole section on goal setting later, because it is a critical activity for all traders and investors. But for this week — on to the controversy!

The goal setting debate comes down to two points of view:

The “results-oriented” camp. On this side of the tracks, all goals must be attached to tangible and measurable results. These goals are the favorites of management-types. They are also strongly emphasized among athletes who compete at a high level.
The “process-oriented” camp. Process-oriented goals emphasize the “how”. What are the things you will do to get to your end results? The adherents of this camp believe that one should focus more (or even exclusively) on the activities required to achieve a certain result rather than on the result itself.

In the trading and investing world, the debate about process vs. results in goal setting rages on. Should you set goals for how much you should make daily, weekly or monthly? Or should you concentrate on getting the process right and ignore the outcome?

Let’s shed some light on the “right way” for traders and investors to set goals by studying some common activities that almost everyone has worked to master.

Learning to walk. How do infants learn to walk? Constant trial and error, encouragement from loved ones, and patience. Here’s a question for you: How long a time period will you give your child to learn to walk? It’s a ludicrous question. The answer is, “As long as it takes!”

My son Josh was a “late” walker. He did not take his first unaided step until he was 15 months old. We were actually beginning to wonder if we had overlooked a developmental issue with him. But in a move that was quite unusual, when he finally took his first step, he didn’t stop! Most infants take a step or two or three and then flop down. Josh just kept going. He ended up taking 13 steps the very first time that he took off! I guess he was just ready.

When we are helping a child learn to walk, we concentrate on the process. Placing one foot in front of the other while maintaining balance. Taking steps that are not too big. Stepping on the ball and heel instead of the outside of the foot.

Contrast this to when the person is ready to compete in athletics. We help them get better by setting clear goals. If you want to train a sprinter, you continue to work on the process but you set clear performance goals to act as milestones for training.

Or how about learning to drive a car? (Those of you who have taught a son or a daughter how to drive, have many experiences to share I’m sure!) But when doing so, you have to concentrate on the process. You want to new driver to go a short distance without having or causing accidents. And you want them to be able to do that consistently. You don’t care if it takes ten minutes to get to the store instead of five. You just want them to operate the vehicle safely — as they improve their skills they can learn how to time entries into busy intersections and do other things that will make them faster and more efficient drivers.

A competitive race driver will have a different regimen. Instead of concentrating on just getting around the track, the driver works on issues that will allow him or her to shave seconds off of their times. Faster results and better times will be the goal for the driver on every circuit taken.

Trading and investing are learning experiences as well. And while there is no one “right way” to set goals for everyone, there are some practical guidelines that can help traders and investors at all steps along their journey to mastery. Process-oriented goal and results-oriented goals both have their useful place for traders and investors.

However, if we get the wrong mix of process vs. results goals at the wrong time in our trading career, the process can be counterproductive or down right destructive.

In my next article we’ll dig in and find out what the proper balance between these two goal-setting camps is right for you.

I hope that all the love and joy of this Christmas and Hanukkah season are with you and your families! And may you have a happy and prosperous New Year!

Your thoughts and comments are always welcome — please send them to drbarton “at”

Great Trading,
D. R.

About the Author: A passion for the systematic approach to the markets and lifelong love of teaching and learning have propelled D.R. Barton, Jr. to the top of the investment and trading arena. He is a regularly featured analyst on Fox Business' Varney & Co. TV show (catch him most Thursdays between 12:30 and 12:45), on Bloomberg Radio Taking Stock and MarketWatch's Money Life Show. He is also a frequent guest analyst on CNBC's Closing Bell, WTOP News Radio in Washington, D.C., and has been a guest on China Central Television - America and Canada's Business News Network. His articles have appeared on and Financial Advisor magazine. You may contact D.R. at "drbarton" at "".

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