Principles of Goal Setting in Trading
Sometimes, inexperienced traders are advised by the uninformed to stop trading if they make, for example, a 30% profit in one day.
Consider a company that forecasts a monthly profit of 50%. If it achieves 60% profit, would it stop its activities? Clearly, the answer is no. Therefore, there’s no reason for us to stop ourselves in a high-potential market.
However, this should be done logically and under conditions where the trader is not overwhelmed by excitement or pride. In other words, if the trader has gained full control and can consider all the defined rules for new trades, there is no reason to stop.
In every job or business, we will only succeed in achieving our goals if we are our best selves and focus on improving the quality of our work. For example, in trading, we should aim to reduce our trading errors, increase the percentage of profitable trades, or improve the return on our trading costs. In general, we should strive to enhance the performance of our trades.
So, when we focus on the quality of our work and pay attention to a higher goal (such as achieving better financial status) rather than specific and idealistic goals emphasized in self-help books, the mind will plan (e.g., in financial management) in ways we might not have considered on the first day.
Return is a broader concept than gain. Simply put, return is the total of all profits divided by the total cost incurred. Return reflects your overall behavior and trend in the market. Thus, at the end of a financial period or during various periods, traders can determine their return on investment and capital.
But what is gain in the stock market? Gain only refers to the increase in the price of a stock and the profit made from selling it compared to the incurred costs. Gain can show how much profit you have made from a trade (not an investment).
Note that there are many differences between trading and investing, which some mistakenly consider the same. A trader seeks high gain and moves based on sales profit, while an investor is more focused on overall return and moves based on investment profit. Despite their similarities, these two concepts have major differences.
Gain is one of the most important tools that can help us move from incorrect emotions to accurate quantification. Emotions tend to be kind, showing us what we want to see. People like to have made a profit, so emotions might behave in a way that exaggerates this profit or minimizes losses.
This emotional behavior in the stock market is somewhat akin to a false friend. When you cannot accurately see the results of your actions, you cannot make the right decisions for continuing your path and choosing your strategy. Therefore, it is essential to understand what gain is in the stock market; gain can transform a qualitative experience into a quantitative one. This helps you make better decisions regarding your strategy.
If you record these gains or design a chart based on them, you can quickly and easily identify the trends in your trading. This trend is important for finding weaknesses and strengthening strengths. Everyone makes mistakes, but it is crucial that these mistakes turn into opportunities for success. If you cannot handle or analyze these mistakes correctly, you will be at a disadvantage. Thus, gain can show you where you are on the path and how effective your strategy has been.
Capital management means reaching a stage where you trade with market money, not your own money, in the Iranian stock market, Forex, or cryptocurrencies. Manage your money in such a way that after implementing the capital management strategy, which I will teach you, you withdraw all your money from the market and trade with the profits you have earned.
What is Capital Management?
Capital management means maintaining and growing money through investing. Investing involves using money to earn more money, which can also lead to losing all or part of it—a risk known as investment risk.
Investment risk is the danger that threatens your capital during the investment process.
As you might have studied, you can easily grow your capital in the stock market, Forex, cryptocurrencies, or any other market and reach a point where you no longer need to put your capital at risk and can trade comfortably with market money.
However, to achieve this goal, you need two things: First, an appropriate trading strategy, such as a price action trading strategy, and second, access to mentors and experts who can support you at every step of the way.
As soon as we enter the market and open a trade, the only thing we can control is our own behavior according to the trading strategy. We have no control over the market or its direction. Therefore, before entering a trade, we must use capital management to enter with a volume that, if the price moves against us and hits our stop-loss, will allow us to exit the trade based on reasonable risk. If a good position is identified (e.g., a small stop-loss), we should adjust the volume so that our overall risk percentage does not increase
What is Capital Management?
Capital management refers to the methods and strategies used to control and grow your investment capital. It involves making decisions about how to allocate resources, manage risks, and optimize returns. The goal is to preserve capital while aiming for growth through strategic investment
Importance of Capital Management
Proper capital management is crucial because it helps mitigate risks, ensures you have enough funds to withstand market fluctuations, and optimizes the potential for returns. Without effective capital management, you risk significant losses that can undermine your trading or investment strategy.
Key Components of Capital Management
Risk Per Trade: Determine how much of your total capital you are willing to risk on a single trade. A common guideline is to risk no more than 1-2% of your capital on any one trade.
Stop-Loss Orders: Use stop-loss orders to limit potential losses on each trade. This helps in protecting your capital by automatically closing a trade if it moves against you beyond a predetermined level.
Position Sizing: Adjust the size of your trades based on your risk tolerance and the size of your trading account. This helps ensure that a single loss does not have a disproportionate impact on your overall capital.
Asset Allocation: Spread your investments across different asset classes (stocks, bonds, commodities, etc.) to reduce the impact of any single investment’s poor performance on your overall capital
Market Exposure: Avoid putting all your capital into a single market or instrument. Diversifying across different markets or instruments can help manage risk and improve the stability of your returns.
Trading vs. Investment Funds: Decide how much of your capital to allocate to trading versus long-term investments. Trading funds are usually more liquid and used for short-term opportunities, while investment funds are often allocated for longer-term growth
Rebalancing: Regularly review and adjust your capital allocation to ensure it aligns with your risk tolerance, investment goals, and market conditions.
Keep Emotions in Check: Avoid letting emotions drive your trading decisions. Stick to your capital management rules and strategies.
Stay Informed: Continuously educate yourself about market trends, new investment opportunities, and risk management techniques.
Seek Professional Advice: Consider consulting with financial advisors or mentors who can provide guidance and help you refine your capital management strategy
By implementing these principles and practices, you can enhance your ability to manage capital effectively, reduce risk, and improve your chances of achieving your financial goals.
