How to Manage Your Expectations

Trading is a tough business. You need to have enough conviction in your methodology to realize gains while also managing your ego so you don’t get ahead of yourself. Personally, most of my biggest mistakes occurred when I was trying to force my method for big gains.

With the trend in social networking, it’s easy to get an idea of how other traders are performing in real-time. Joe Trader just made 30% on this trade, Jill Trader just doubled her account over the past month. With all these inputs coming at you, it’s easy to feel like you are under-performing. In this case, there are too many unknowns, what is their performance over the past year, five years, ten years, how much money are they actually trading with, are they even telling the truth?

Being the youngest of four brothers, I’ve been pretty much conditioned to compete in almost any activity. Yes, it does push you to try to go further, but with trading it can be a curse. Constantly trying to keep up or prove something is a recipe for a draw down.

To overcome “trader envy”, removing your ego entirely from the equation and coming at it from a neutral state of mind is ideal.

Boiled down to its most simple form, each day you are making a choice that your next trade will go up based on a set of variables you have defined as important. That’s it, we’re not curing cancer. Whether we make a thousand dollars or a million, we’re just making a bet that the stock will go up. Sometimes we’re wrong, and hopefully more often we are right.

We have to measure our progress to know whether our efforts are worth the precious time and energy we pour into them day in and out. This is where the indexes come into play. We know if we buy an index fund we can at least reproduce the gains or losses on that index. We’re dealing with fact, not the huffing and puffing of some stranger out on the social web. I like to use the S&P, which is currently up 5.05% YTD.

At this point, you need to define what would be a reasonable return compared to the S&P to make your efforts worthwhile. Would 1.5x, 2x the S&P be worth the time, possibly 3x the S&P? This is for you and only you to define. Using this, you can check in every quarter to gauge your performance. At the year’s end, lay out everything on the table and figure where you went wrong and where you went right.

If you’re just starting out, your expectations should reflect the fact that you are learning and will make some mistakes while mastering a methodology. Trading is a culmination of your efforts over time. By using a neutral benchmark such as an index, you will be able to gauge whether your methods are working and avoid the “trader envy” trap. From there, you can adjust and refine your method so you can consistently extract profits from the market.

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