3 min read

The 5 Hidden Dangers of Performance-Based Trading Goals

performance goals in trading

Many traders establish daily, weekly, or monthly profit goals, aiming to achieve a certain percentage return every week or every month.

If you are like most traders, you probably have done this previously as well: you pull up an Excel spreadsheet, input your current trading capital and then calculate how much weekly or monthly percentage return you must generate to turn your $10.000 trading capital into $1.000.000 in a year or two.

Unfortunately, goals directly tied to trading performance are not always the optimal choice and they can even have a negative impact on one’s trading performance and behavior.

Trading involves a great deal of uncertainty. As a trader, predicting the market's behavior on any given day or week is impossible, and attempting to impose your will onto the price charts can be equally futile. With that in mind, here are 5 reasons why setting daily or weekly profit goals can create pressure and may not be an effective trading strategy:


1. Profit Goals Create Unnecessary Pressure

Predicting the number of trades a trading strategy will generate, how many of those trading opportunities will turn into winners, and the amount of profit each trade will generate, is simply impossible.

If the markets aren't moving in your favor and your trading strategy is not producing trading signals, you may find yourself feeling frustrated or pressured to break your rules and enter random trades to hit your target.

If you're approaching the end of your goal period and you're not close to your profit goal, you might feel pressured to make trades that you otherwise wouldn't. This could lead to poor decision-making and taking riskier trades that aren't based on your tested strategy rules.


2. Deviating from Your Trading Plan

To hit your profit target, you might feel the pressure to deviate from your trading plan, hoping to realize larger winning trades than you normally would. Such a greedy trading approach usually leads to traders giving back unrealized profits when the price turns against them.

Over the long term, following your trading plan and taking profits when your tested trading strategy signals you to do so is the right decision and will lead to more consistency in your trading results.

Thus, best practices in trading include having a trading plan before entering a trade. Pre-planning trades with an objective price analysis and pre-determined targets allow traders to realize better trades and feel less tempted to deviate from a plan afterward.


3. Dangerous Risk Management Practices

Setting daily or weekly profit goals can result in poor risk management. In an effort to reach the set goal, a trader may risk too much on a single trade or overtrade, which can lead to significant losses.

Make sure to pre-define your trade position size. A regular trade review can reveal deviations from your position sizing strategy and help traders correct future risk management decisions. Once traders recognize how much money they lose by breaking risk management rules, they should become more sensitive to position sizing mistakes.


4. Forcing Trades Without an Edge

Typically, traders use trading strategies adapted to specific market conditions. Trading strategies only generate signals when certain chart and price criteria are met. Ideally, traders have backtested their trading rules on historical price charts to verify their effectiveness.

Traders falling short of their set performance goals are more likely to trade when they don’t have an edge in the market, meaning they enter trades when the market does not favor their trading strategy.

For instance, a trend-following trading system can usually only perform successfully when the market is in a trending phase and shows a high momentum with lower levels of volatility. Trading within a range-bound market with a high level of volatility may not lead to positive trade outcomes because the market conditions do not align with the used trading strategy.

Traders have no control over the general market environment and must avoid forcing trades when the market does not favor their trading rules. Remember: not having a position in the markets is also a position.


5. Performance Goals are Arbitrary

Lastly, the performance goals most traders use are not rooted in reality, and they are not the result of extensive backtesting – as they should. Typically, traders devise their performance goals by calculating how long it would take to achieve an arbitrary figure in their trading capital; typically traders estimate the weekly or monthly percentage performance required to reach $1.000.000 in their trading account.

These calculations are founded on wishful thinking and have nothing to do with how their trading strategy has performed in the past. Such performance goals are unrealistic and tend to lead traders toward poor decision-making, as outlined in the points above.

At the very least, you should attempt to base your performance goals on historic performance data and your current level of expertise. However, not tying goals to trading performance still remains the better choice.


Final Words

It's important to remember that successful trading is more about long-term profitability than hitting specific short-term targets. Rather than setting daily or weekly profit goals, traders might consider setting process-oriented goals, such as maintaining a certain risk-reward ratio, adhering to their trading plan, or improving their analysis skills. These types of goals can foster consistent trading habits, better decision-making, and ultimately, improved trading results.



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