I love to teach this topic because it gets me refocused on my own purpose for trading and managing money. I stated in my opening remarks that the process of trading begins with the understanding of who you are, what you want and a strategy for attaining the desired outcome. If you think about that statement for moment and ask yourself those simple questions, and answer them honestly, it gives you clarity relative to what you are doing with your own strategy relative to trading and managing money. I came to the conclusion many years ago that trading/money management is not about performance as much as it is about the accomplishment of goals. In other words I want to make money on my money to provide me the lifestyle I desire to live. Over the last thirty plus years I have sent two daughters to college, paid off my house, own my cars, have two other daughters in private school, bought my mom a house, and the list goes on. Just as importantly, it keeps me focused on what I want to do now and going forward. Travel, purchase a new car, send my last two daughters to college, pay for three more weddings, etc. etc. My purpose for trading is to live my life the way I want to every day! Yes, in the end that comes down to return on investment or performance, but what it really comes down to is making money on my money to attain a specific objective. That is where the rubber meets the road, so to speak, and gives you a clear understanding and ability to answer key questions pertaining to position in your portfolio.
Having a defined strategy to accomplish your goals create conviction and belief. From that conviction you are able to trade on purpose because you understand what you are attempting to accomplish. This strategy applies to both long and short term goals. If we decide our trading strategy is swing trading using technical analysis, we have to practice and build the necessary confidence to trade according to our strategy from a position of confidence or habit versus emotions and fear. We put our beliefs into action based on confidence of having done it routinely over time. The strategy is what you become focused on, not performance. I make a concerted effort to focus both my trading and my professional trading on the same level of a defined strategy that is focused, disciplined and simple. In the example of swing trading, we can define our process for entry signals as well as how we will place the orders to buy our positions. We can define our target or what we want to accomplish from owning the position. The importance of knowing or defining the target is it allows you to make a logical decision of what to do when you accomplish the objective. Do I sell, hold, sell part of the position and hold the balance? The decision process become focused on the goal and not greed. Equally we can define our stop or exit points if the trade fails to do what we expected when we purchased the position. The strategy drives how we get into the trade, where we are going with the trade or the goal, and it defines what we do if the position doesn’t go according to plan. Simply put, it adds the discipline to our trading we all need.
Trading ON Purpose is a simple approach to understanding why you are trading. It gives us the ‘Why’ so we can define the ‘How’. Doing something without a specific goal in mind keeps many people from achieving anything of importance. Going to work every day because you need to pay your bills is not a great motivator. Going to work every day because you love what you do and it is achieving the underlying objective you set out for yourself before you started the job, is a driving ‘Why’! A motivating ‘Why’ allows for creativity in the ‘How’. You will find the same is true when trading your money. If the ‘Why’ is motivating, the ‘How’ will become more creative and defined. Most importantly it will put disciplined risk management rules into your strategy. But, that is a topic to cover at another time. In fact, that is the fourth part of this four part series, “Back to the Basics” a trading camp for investors (purchased in right column).
Enjoy this first part of the Back to the Basics Series: Trading On Purpose
If you would like to purchase the whole series click the link in the column.