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Thursday, July 10th, 2008

Ken Grant’s three trading goals (Goals, IV)

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The previous posts on goal setting looked at what we can expect from the market, and the thoughts of trading coaches Ari Kiev and Brett Steenbarger.

Kenneth L. Grant, a risk manager who has worked with the likes of Paul Tudor Jones, is another who has written extensively on goal setting; in his case in the book Trading Risk: Enhanced Profitability Through Risk Control.

Grant, who calls goal setting “setting performance objectives”, says as traders we operate with two major constraints: changing market conditions and a trader’s finite resources. Because of that he advocates goal setting with a number of possible outcomes:

1. Optimal target return

The profit you are shooting for if everything (i.e. external market conditions and internal account management) goes right. Your profit figure should typically be high enough so that you will have to stretch your skills to reach it, but not so high as to be inherently self-defeating. Grant gives some guidance as to what the optimal target return might be: “… if you are comfortable that in a given cycle you are likely to make $X and then set your target level of return to, say, between 125 per cent and 150 per cent of $X, you will simply not have any alternative other than to take a look at every individual subprocess in order to find sources of potential efficiency improvement and scalability.”

2. Nominal Target Return

Fixed at the amount of revenues that you feel confident you can achieve under almost all market circumstances and below which you will acknowledge that something may have gone wrong with your plan, thereby allowing for subsequent critical analysis.

3. Stop-out level

The loss at which you will commit to a complete liquidation of your portfolio – and is a figure you must commit not to exceed.

An example of using the three targets might be something like during a bull market setting an optimal target return of 50 per cent; a nominal target return of 15 per cent; and a stop-out level of 20 per cent. In a tough year like 2008, it may be a 20 per cent optimal return, 8 per cent nominal return and 10 per cent stop out.

I have found using the three targets particularly useful. My system is trend-following in nature and returns depend a lot on where the market heads. I don’t have a strong idea of what my returns for any particular year will be. In a raging bull market, returns of 50 per cent are more than achievable. But the three goals/targets mean that even in bear markets, I have a big goal to reach.

As I have mentioned in the previous posts, having a big goal is motivating; it makes me focus more closely on the market and look for opportunities. I’m either looking to short stocks, or searching for signs of the start of a new bull market, which is when my system makes big money. At the end of a bear-market year, I’m likely benchmark myself against my nominal target return, but during the year I’m still shooting for higher returns.

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Word Count: 509. This entry was posted on Thursday, July 10th, 2008 at 12:05 am and is filed under 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.