That’s a quite popular question in the trading world. Together with its variants, ‘what’s your daily, weekly, yearly profit target ?’ it offers one way to gauge the trading experience of the person who asks. In most cases it will come from beginners and it’s the scope of this article to show why it is so and why having profit targets is wrong.
With trading being a business, that might sound counter intuitive. After all, companies, big and small, have profit objectives. Why shouldn’t it be the same with trading ? Because of a fundamental difference that I have mentioned before. You have no control over the markets. You can’t dictate it to give you 10% monthly because that’s a nice round number and your excel spreadsheet shows it takes only 5 years at that rate to become a millionaire.
A clothing company for example might purchase more machinery, hire additional people and double their yearly profit (provided there’s enough demand for the merchandise, of course). It should be obvious that this business model isn’t possible in trading. Buying another computer screen and following more currency pairs won’t get you anywhere if the market isn’t in sync with your system. It might even have the opposite effect, as it might get you to over-trade.
Buy or develop another system then, is what some of you might think. Wrong answer ! No ! Buying black-box trading systems is a fools game anyway, but that’s a topic for another article. It takes time (years) to develop a system that fits your personality. Are you telling me that you’re going to change your personality every time you’re not meeting an arbitrary profit target ? You might find this film interesting in that case.
So although it’s a nice thought that trading can be some sort of annuity, I hope you realize that’s impossible. Shouldn’t there be any kind of target then ? Let’s see, if you can’t control what the market is going to give you, what you can and should control is the percentage of trading capital you’re ok with losing every day, week, month or year. If you’re not ok with losing anything, then stop trading and put all your money in a bank deposit. Otherwise you should set a maximum loss target, which is totally under your control. For example, if you’re not willing to lose more than 10% of your capital in a month, you should just stop trading for that month if you reach -9,9%.
I want to make sure that I never have a double-digit loss in any month. – Paul Tudor Jones
Photo credit: http://www.launchengineering.com