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Trading profits flow from the right expectations

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By David Hobart, Director, PsyQuation Consulting.

Quite often traders lose money in the markets simply because they have unrealistic expectations about their likely returns.

Even the best trading systems and strategies if not given adequate time and space to perform, will produce disappointing outcomes for their users.

When traders first engage with PsyQuation, the software asks them to enter their profit goals and drawdown tolerance. Getting these expectations right can have a significant impact on profitability.

So how do you know if your expectations are realistic?

When drawing up your goals and expectations, be sure to remove “need” from your situation. For example, if you need to generate a certain amount of income per month for living expenses and expect to consistently make that from your trading, you are likely setting yourself up for frustration and disappointment. Even the most experienced of traders find this difficult if they are reliant on their monthly trading profits for their living expenses. Look to supplement your income from trading; not replace it. Or better still; allow your trading accounts to grow for 18 months without any need to draw from them. This will give you time to get into the flow of your strategy and removes the desperate energy of need.

The other problem with trading out of a need for consistent income is that you will only focus on strategies that produce monthly income. There is nothing wrong with these types of strategies, but it’s important to trade strategies that are aligned with your strengths and personality type. I used to be a spot FX trader; jobbing the market on the back of customer flows and an order book. I was terrible at it. My personality is more prone to stability than stimulation, and consequently a short term strategy scalping the market is not where my strengths lie. When I moved into more medium term directional strategies, my profitability increased dramatically. Given the medium term nature of my strategies, I don’t make money every month. So if I was reliant on income on a monthly basis from my trading, it would be an unrealistic expectation and would no doubt lead to frustration and disappointment.

Understanding the relationship between drawdowns and returns.

When testing a strategy, it is easy to get excited about the potential returns. But that is of course only one side to the equation. Have a look at the depth of the drawdown and ask yourself if you would be able to trade through it if it happened again. It might be that you are not comfortable with the depth of the drawdown, and your account size or risk management may not be appropriate. What you may then find is that by reducing your account size, or reducing your risk, your profit expectations will also need to be reviewed.

Realistic expectations lead to peace of mind and greater profits.

By looking honestly at your expectations, you might just find that it uncovers holes in your strategies and processes. This is a great thing as it is always better to see reality before the market shows it to us the hard way.

About David Hobart

David has been a trader and portfolio manager since 1994. He has managed teams of traders for global investment banks and hedge funds including BT, Macquarie, ABN Amro and Blue Sky Alternative Investments. He has worked with numerous traders and portfolio managers as a trading coach/performance consultant. For a detailed review of David’s CV, please see his LinkedIn profile.

If you would like to find out more about David’s trading coaching/performance consulting programs, check them out here or email david@psyquation.com .

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