Tuesday, June 24th, 2008
Ari Kiev on setting trading goals (Goals, Part II)
Ari Kiev is one of the best known trading coaches, having worked closely with hedge fund legend Steve Cohen. He was also profiled in Market Wizards. So it pays to listen closely to what he has to say about setting good trading goals.
Dr Kiev is a big advocate of goals, believing they generate creative tension that forces a trader to seek out opportunities, rather than wait for the market to provide them.
“When you have a goal there is a discrepancy between where you are and where you want to be that sets up creative tension and pushes you to utilize information more efficiently,” he says.
He also believes the goal should be challenging and, if achieved, record breaking. “Usually we are accustomed to thinking only in terms of reasonable, certain, achievable goals,” he said. “Therefore we continually search the past to determine whether our goals are achievable and in doing this live in the realm of prediction and certitude. Our experiences are repetitive because we are generally relying on proven formulas and recipes as we approach the future.”
Dr Kiev recommends “commitment to a specific objective” as opposed to “simply being opportunistic.” “Commitment is the willingness to risk yourself by promising a result without guarantee of the outcome,” he said in his book The Psychology of Risk.
He believes trading goals should be as specific as a daily profit goal – one of his more controversial suggestions. “The target forces you to ask the powerful question of what is missing from your present infrastructure or strategy that is essential for reaching the target,” he said. “Everything is focused on the target and all that you need to realise it.”
Obviously setting a daily profit goal is more suited to short-term trading, which he believes is more effective than longer-term fundamentally driven trading. Short-term catalyst-driven trading with a goal “points up the possibility of creating the result rather than accepting results that mirror the market action,” he says.
But he does believe that longer-term, fundamentally driven traders should also set shorter-term goals. One compromise on the daily profit goal is to “focus their trading better by considering how they can make 2 per cent or 3 per cent on their money in a month.”
To achieve this he outlines a number of strategies, including getting bigger in conviction trades, scaling out of trades after big run ups, reducing short position in illiquid stocks, being more selective in short selection, and focusing on short-term events where money can be made which may mean trading in the opposite direction of their position.
“The goal in working with long-term, value-driven portfolios is helping the traders to maximize their profitability by adding the powerful component of goals to their strategic planning,” he said.
I agree with Dr Kiev that setting challenging goals is important. I’ve found that without a suitable goal to shoot for it’s easy to not be proactive and to make excuses when opportunities are presented.
But given my longer-term trading method, I don’t believe that short-term goals are healthy. When I have tried them they created too much “creative tension” and I became anxious about meeting them and lost my ability to see the market clearly.
The design of my system, which involves riding trends in aggressive-growth stocks, means it is drawdown for considerable periods, with profits not coming consistently, but in spurts. Short-term goals are at odds with its performance. Setting short-term goals, then failing to meet them for long periods, would cause unnecessary angst.
I set a challenging annual goal, which gives me space to ride out drawdowns, but also forces me to go looking for opportunities because I know that if I don’t take them, there’s no chance of meeting the goal.
As we’ll see in the next post, goals can be both improve and detract from performance.
Word Count: 627. This entry was posted on Tuesday, June 24th, 2008 at 11:04 pm and is filed under Investing psychology, Trading goals, Uncategorized. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.
July 7th, 2008 at 12:41 am
[...] Trading goals, part II [...]
July 10th, 2008 at 12:05 am
[...] on goal setting looked at what we can expect from the market, and the thoughts of trading coaches Ari Kiev and Brett [...]