Maybe it’s the bubbles in champagne, or the sound of the cork popping, but New Year’s always brings out a rush of emotions.
The end of one year naturally lends itself to reflection on the past. As the calendar turns over, people wax lyrical about another year passing. Taking stock of the past year, people figure out where they are – and then dream of where they want to be. The gap between those – and there is almost always a gap– can spur us on to change for the better.
Yes, the dreaded New Year’s resolution.
I can hear the skepticism already.
We all know about the person who swore up and down that one year was “’the year’ that they finally got in shape”, only to have their newly bought exercise bike gathering dust by February. We can think of someone who vowed that “this was the year they would spend more time with the family”, only to burn even more midnight oil at the office. Heck, we are probably guilty of these ourselves.
It’s been six weeks into the year.
Ask yourself: are you keeping your resolutions?
Together, let’s make a promise. With us, this year, it will be different.
In this article, we’re going to talk about New Year’s Resolutions (NYR). But not the same old nonsense that you run into. Rather, we’re going to have a heart-to-heart about what NYRs are; how to set them in a way that helps you and sets you up for success; and what you can do to increase your chances of following through and reaching your goal.
And if you’ve set some resolutions and have fallen behind on them, don’t worry. You still have 11 months of the year to make good on your promises.
The case for resolutions
While they are often mocked or criticized, New Year’s resolutions have a certain appeal to them. The new year offers a blank slate and you can draw whatever you want. You can choose to be a new version of yourself—thinner, in better shape, more popular, richer. It is an easy way to turn our discontent and frustration into happiness; our dreams into a reality.
For traders, the New Year’s offers even more of a blank slate. Our monthly and yearly P&L figures reset. If you were down, then you are starting out fresh. If you had a big year, then it’s another chance to have a good year. Either way, every January 1st offers us a similar chance to turn our P&L dreams into reality.
As people in the markets, resolutions can be enormously helpful in improving and allow us to make progress toward bigger goals. We should use them to guide our self-development and as benchmarks for measuring our progress. But in order to get the best out of them, we need to be aware of the difficulties that often accompany New Year’s resolutions.
The difficulties with New Year’s resolution
There are some difficulties that often come up with New Year’s resolutions:
- They don’t work. While lots of people make them, very few actually accomplish them
- Most are formulated improperly, almost guaranteeing failure.
- They are hard! Change is not easy or straightforward.
Chances are that you’ve already made a few resolutions. If you haven’t, then I would encourage you to do so. And hopefully you haven’t yet broken them, either!
One of my friends posted on Facebook on the evening of January 1st “Who has already broken their New Year’s resolutions?”. The post was deluged by “Likes”, suggesting that this resonated with a lot of people. It resonated for a simple reason – most people don’t keep their New Year’s resolutions, not even for a few hours!
As of this writing, it’s the 10th of February. Be honest with yourself—how many of your resolutions have you actually kept? Probably very few, if at all.
In her book This Year, I Will…, MJ Ryan puts out the figure that only 8% of resolutions actually succeed. 8%! Despite all of the best and most genuine intentions, very few people can convert those dreams into a reality. This actually reminds me of another fascinating statistic, documented in the book Change or Die: of patients recovering from heart surgery confronted with the choice between changing their eating and exercise habits or face a huge risk of death in the next two years, only 10% were able to change. Despite being offered the choice between life and death, only 10% could make the necessary changes.
The lesson is clear: change can be hard, even when you have the right motivations.
Taking Stock—Making Good Resolutions
The first step towards making resolutions is to take stock of where you are. Get a good, objective appraisal of yourself and where you are. For a trader, that includes things like
- Your trading records.
Make sure you have reliable records of what you have been trading— what and when you have been buying and selling. These records should be detailed, including both the date and times of all of your entry and exit points, but also additional useful info—your trade rationale, your stop loss and take profit points, etc.
You should also have a history of your position sheets, so that you can see what risk you had on throughout the past year and graph the changes in exposures. The goal of this exercise is to know what you were doing at any given moment in time and what kind of risk you had on.
I am hoping that you kept good records throughout the year. They are a critical element of success— much like keeping sales receipts at a store. If you were not keeping good records, then it usually reflects some deeper internal conflict. For instance, if you were losing money, are you afraid of looking at your records because it will reveal how much money you were losing? Is trading just a “hobby”, where you track your actions as much as you do your golf scores? The solution to having poor records is simple—get serious about your trading. Treat it like a business. Put in places controls and processes, much like in any other business.
Once you have this information ready, then you have the raw material necessary to undertake a thorough self-analysis. You can comb through your records and start to figure out patterns—were there certain trades that worked consistently? Did some not work at all? Were you trading too often, not often enough or just about right? Was your position-sizing too aggressive—or too timid? In short, figure out what was working and what was not. Use your records to determine what to do more of, and what you want to change for the better.
A complete self-inventory gives you the chance to figure out where you are in your trading—the good, the bad and the ugly. Armed with this knowledge, you can identify what your goals should be and then move forward confidently towards them.
2. Your P&L
This is obviously what it’s all about—the ultimate judge of success or failure for someone in the markets, whether they’re a day trader or a long-term investor like Warren Buffett. But for the purposes of this exercise, your P&L is a subset of your records—if you’re keeping good records overall, then it’s doubtful that you’ll know what your overall P&L is. Let’s recap: keep good records, including of your P&L!
With your P&L, you’ll want to review it for patterns, but not just in isolation—you’ll want to tie it in with your trading records to see possible relationships. What kind of entries are your most profitable? What kind of exits create profits and limit losses? Are you most profitable when you are taking lots of risk, little risk or something in between? Are your profits lumpy or consistent—and does that match your style? For instance, if you’re a scalper, then you would want to see consistent profitability over any timeframe longer than a month. If you’re a long-term investor, then you would want to see profitability over longer periods, like a year, and it would be acceptable to have a lumpier P&L chart—providing that the profits outweigh the losses.
Overall, your goal is to understand what’s going on within your P&L chart and how it works as a function of your trading decisions. Remember, trading well is about making the right decisions—if you do that, the money will follow. Focus on what the P&L is telling about you how you’re trading—and let it serve as another way of identifying what you’re doing right versus what you could improve.
3. Your trading journal. You are keeping one, right?
As we have seen, records are important. A trading journal is different—it records what you were thinking about the markets and anything else that was relevant, as opposed to just the individual trades that you put on and took off.
If you aren’t keeping a journal, then I strongly advise you to start doing so. Your trading journal is more like a record of what was going on in your head, in real-time. What you think about the markets; which indicators you’re paying attention to and what they’re saying; the positions you have on, what’s happening with them and how they’re performing; your own physical and emotional state, both within the markets and events outside of the markets that may impact you. If you’re in a slump or if you’re doing sooo well and think that it will never end, then write that down in your journal.
Trading is full contact. You need to keep an eye on everything that can impact your performance—what’s happening with your positions, the markets, your main indicators, the news, stuff in your own life. Everything. Think of your trading journal as a repository of all the information that could be relevant in any way.
The most immediately useful thing about a trading journal is that it encourages you to observe markets and yourself more closely. Whereas you might have had some analysis that you kept in your head, the act of thinking about it and writing it down will improve your observational skills, thereby helping you to analyze the markets better. It will also help you to have a better handle on yourself and your own states—and when you are at your best, versus struggling.
Once you start monitoring, then you can perform the same introspective analysis that you did earlier—how does your performance match up with certain market conditions, market thoughts, etc? For instance, if you recorded the fact that you’re scared in your journal, and your P&L was nevertheless good during that time, then that sentiment illuminates a potential change in your style. If you start performing well following a period of sustained exercise, then all of that extra oxygen must be helping!
4. Your previous goals
You will also want to evaluate your performance in light of your previous goals. For instance, if you set yourself a goal of going from $15,000/month to $25,000/month and you reached it, then great! You’ll want to figure out what contributed to your success—was it better risk management, trading bigger size, sticking to a few, core setups, etc? Once you can identify the contributors to your success, then you can try to keep those up while also training up your other weaknesses.
If you haven’t lived up to your goals, then there are a variety of questions to ask yourself. Were your goals realistic? If you were expecting to go from making 15% a year to 115% per year, then you were probably ahead of yourself and not likely to make it happen.
Assuming you had reasonable goals, then you want to figure out what may have gone wrong. Perhaps your goals were right but the markets were wrong for your trading strategy. If you have a trend-following system that has made 15% per annum, even it may not make money if market conditions change and there are no trends for a year. If you are a range trader, then a trending market would be death for you. Every strategy has market conditions where it works well and where it barely works—make sure that you are not trying to make miracles happen in poor market conditions.
I get what went wrong—now, how do I fix it?
By reviewing your list, you should have a good idea of what wasn’t working. Obviously, if you weren’t keeping good trading records, then you aren’t in a position to set good New Year’s resolutions—it’s like trying to drive somewhere without a proper map.
Now that you’ve taken stock by looking through these four areas of your life, you can focus on a couple of areas where you want to make progress. These could be real weaknesses and deficient areas, or they could just be areas where you’re doing well and you want to keep getting better. Nevertheless, the first step towards reaching New Year’s resolutions is to set goals properly. If they’re not formulated properly, then your efforts may be stymied or ineffective. It’s like having a bow and arrow but not knowing where to aim it—of course you can’t hit the target!
Setting Goals Properly
What you need to do now is to set, or to redefine, your goal properly in a way that it can be reached—and you can know whether or not you’ve reached it. If you can’t measure the goal in some way, then how do you know if you’re making progress towards it? How do you know whether or not you’ve achieved it? In a trading context, setting measurable goals is even more important because our P&L is only the long-term yardstick we have to judge our own success or failure!
In her book, MJ Ryan suggest the following formulation for New Year’s resolutions:
S: Specific. You know what you have to do and have clear instructions for yourself. E.g. “Become a better trader” is not specific; “Boost my profitability from 12% per year to 16%” is.
M: Measurable. You can measure it.
A: Achieveable. Setting unrealistic goals only sets us up for failure and will reject our . Seeking to increase one’s trading account from $1 mln to $1.2 mln is realistic; trying to go from $1 mln to $10 bln is not. Try to balance it on the knife edge between a “stretch” while still realistic.
R: Relevant. It has to directly impact your trading and profitability. Having better handwriting in your trading journal is a cute goal, but it has zero relevance for your profitability.
T: Time-bound. You have to set yourself a deadline.
If you have all five, then you have all of the pieces of a realistic New Year’s resolution. If you had resolutions, were they SMART? Were they specific and measurable? Or were they too generic and amorphous to be effective?
Examples of SMART Resolutions:
“By the end of 2013, I will go from making $10,000 per month to $12,000 per month”.
“By the end of 2013, I will boost my win rate on trades from 40% to 45%”
“By June 30th 2013, I will be trading comfortably 20% larger positions than I did in 2012”
Related to making them specific them measurable and specific, you want to think of some kind of tracking system. After all, if it is measurable, what is the best way to measure it? As we discussed above, hopefully you’re keeping goal records already and are already tracking everything that you want to. If not, then this is another reason to upgrade your record-keeping.
The last part of this is a little more abstract but still important. Tell yourself why you want that goal. And don’t use the standard answer: “To make more money”. Yes, of course you do. But what inspires you about being more profitable? Find that emotional undercurrent and connect with it.
Connecting with your core emotional needs will give your resolutions infinitely more appeal and power. The core desire could be as simple as “Because then I can better take care of my family”. Taking care of your family is a noble goal and that desire will definitely spur you on to bigger and better things. Your core motivation could be more self-referential: “I want to feel like a success” “I like the feeling of personal growth that comes from hitting goals” “I want to overcome my self-doubt”. Dig down as to real motivation behind your goals. By connecting with your core self, your goals will go from being abstract “targets” to resolutions and commitments that inspire you. You will go from having targets that you can’t possibly hit to having dreams that you can’t imagine NOT achieving.
By now, you should already have some good resolutions backed by some genuine emotional content. Or maybe you have just recalibrated your existing ones so that you are ready to get back on track for the rest of the year. What comes next?
How Do I Achieve My Resolutions?
You now know to how set New Year’s resolutions properly. Once you have SMART goals, then the next step is figure out how to achieve them. As I wrote about in another article, the key to improvement is to figure out your goal and to work backwards into small, measurable and actionable steps that will get you there.
We all understand this in regular life outside of the markets. If you really wanted to lose weight, you would decide to cut out certain fattening foods and to get more exercise. You would weigh yourself regularly. If after two months you were making progress, great! Keep doing what works, or possibly do more of it –for instance, further optimizing your diet or incorporating more strenuous and frequent exercise. If you were not making any progress, you would do so more investigating or maybe try something new in order to get to your goal.
Bringing this back to markets, imagine that you are a day trader and want to go from making 1% per month on your capital to 1.2%. This would have a meaningful impact on your results for the year—it would be the difference between being up 12.7% and 15.4%. That’s a reasonable, achievable goal. One element in getting is to boost your win rate from the current 40%. As a first step after checking your records, you decide to stop taking a particular setup because it actually had a success rate of less than 30%. Over the next few months, you can monitor your win rate to see if it’s improving as you would like; if not, then you would have to review your records and your journal further to see what else you could do boost your win rate and to get the results that you want.
Bringing things down into small steps is not a novel idea. But it works. And it’s important to emphasize WHY it works: because it’s the antidote to our own internal stumbling blocks!
The famous trading coach Ari Kiev wrote about this process extensively in his book Hedge Fund Masters. In his interviews with traders, he would start by setting goals that he knew would stretch and inspire them—for instance, looking to make profits that were much higher than what they had ever achieved before. Then he would work backwards as to how to get there.
Obviously, the easiest way to make more money was just to trade bigger size. Do everything else the same and increase your position size by 25%, and you’ll hit your P&L target. Simple, right? However, there was a lot of internal resistance. Oftentimes, the traders found that emotions like anxiety or fear cropped up at the thought of trading bigger size, and they needed an antidote to those fears. One way was to build more conviction in their position—putting new steps or more iterations into their existing investment process to guarantee that they had higher conviction in the position that they put on. For instance, this could include an extra round of supply channel checks or speaking with sell-side analysts to make sure that all of their research made sense. This would neutralize any fears that would come with a trading bigger size, giving the trader a simple roadmap to follow to boost conviction.
One of the most common fears is not knowing HOW to achieve a goal. Anyone can say that “This is the year” to run a marathon or write a book, but they are often paralyzed by the fear and uncertainty of not actually knowing how to do it. In the example above, Ari Kiev was working with individual traders to help them to get specific about how they were planning to achieve their targets. By niching it down to specific individual areas to work on and micro-tasks, we are neutralizing our fears by giving ourselves the necessary tools to reach our goals.
Takeaway: Get specific.
Staying on Course
I can hear you now: “This is all well and good to talk about, but in reality, it’s much harder than that”. That’s true. In practice, it’s probably going to be very difficult to do everything perfectly, as we would like. But that’s why we set and measure goals and take step-by-step actions: to make it easier for us.
As Native Americans say, “Even the longest journey starts with a single step”. If we focus just on putting one foot in front of the other and to keep going, always, then we will make progress on our resolutions. That progress may be imperceptible or slow at first, but after a while, if you have the right tracking system in place, you will see progress.
Just in case you do find yourself off course, MJ Ryan offers some more advice, called the Four As.
- Assess the current situation
- Adjust what needs to be done
- Admire yourself for having the strength to start again
- Act quickly on your new course of action
In practice, this means paying attention to your progress. You start by assessing the situation again. If you haven’t been making progress or even have given up on your resolution, then make a note of that. Focus on your goal and figure out what adjustments you need to make to keep moving. And get to work, patting yourself on the back for doing so.
As much as we would like success and the attainment of goals to be a straight-line and quick process, it usually takes more of a wandering path. We often take three steps forward followed by two painful steps backward. In aggregate, we are still making progress, but we can get frustrated or discouraged by the temporary lack of progress. This 4 step process helps remind us that we are still moving forward and getting there. If you have had difficulty advancing towards your New Year’s resolutions, then put this 4 step checklist where you can see it every day. It will inspire you to keep going, to fight the good fight and to get what you want.
If you have had a disappointing start with respect to your New Year’s resolutions, take heart. If you didn’t set any, then think about it again. If you want to excel this year in your trading, then setting goals can be a transformative step. Hopefully, the steps we went through will help you set and achieve your goals and to reach a new plateau of success and enjoyment in the markets.
How are your New Year’s resolutions going? What have your experiences been?
By Bruce Bower | E-mail: Bruce [at] howoftrading.com
Blog: www.howoftrading.com | Twitter: @HowOfTrading