There are few places where expectations can vary so wildly from reality than in the world of trading, and amidst the noise and newsworthy stories of huge gains and huge losses, it can be difficult to find a sense of perspective and calm.
To be a successful trader, particularly in a world with high stakes such as at a proprietary trading firm, you need to be able to make consistent gains, increase the value of your portfolio by a predictable level and have realistic expectations for how much the value of your forex currency pairs will increase.
This can be exceptionally difficult, particularly for traders relatively new to forex and are still getting used to how the market moves, as well as what a realistic expectation even is.
This is what this guide aims to help with; it will explore why people are not always the best at gauging expectations in forex, what you should expect with your portfolio and how you can adjust your mindset to set your expectations correctly and have a better chance of making money.
Man Bites Dog And Availability Heuristics
There is a saying in journalism that a newspaper will never publish an article about an aeroplane that arrived without incident, because it is such a common occurrence that by definition it is not news.
This phenomenon, also rather hilariously known as “man bites dog” based on a very similar concept, is the irony that rare events are far more commonly reported than more common ones, having the side effect of making the former feel far more common.
Both of these are examples of availability heuristics, where readily available information is used when making decisions and assumptions about future events.
Because there is so much happening in the world at any given second, we pick and choose from what information we have to hand when making a decision, which is why, for example, people tend to believe that air travel is far more dangerous than it actually is.
This can be a problem when it comes to financial markets, and part of the reason why a casino capitalism mindset can sometimes emerge in some traders is because the most widely reported events on the stock market are aberrations.
This can lead to somewhat warped expectations about what is realistically possible with a given asset. An event like Black Wednesday will never happen again in forex, and devising a trading strategy based on essentially rolling the dice on a major notable event is a one-way ticket to a bankrupt portfolio.
On the other hand, this is not an invitation to discount the possibility of potentially devastating but unlikely events either. Long-Term Capital Management’s fateful foray into forex coincided with Russia defaulting on its debt and devaluing the rouble, something believed to be inconceivable at the time.
Why Are Realistic Expectations Important?
A lot of people believe that financial trading in general and forex trading in particular can make you a lot of money very quickly. This is not necessarily false advertising, but it is somewhat misleading about how likely that is.
Forex is not a “get-rich-quick scheme” and any trader who goes into it with an expectation to almost immediately “10x” their investment will quickly find that optimistic delusion punctured.
It leads to a focus on a goal without any idea of how to reach it with an acceptable level of risk, often ignoring the consequences of falling short in a bid to hit a target quickly.
Trading plans, if they are even drafted, go out of the window in favour of impulsive decision-making, which typically translates to very poorly made decisions.
Forex is not a financial discipline that looks kindly on taking punts, but even in the impossibly rare event that someone makes what is essentially a gigantic gamble and happens to succeed, if anything that can be even worse for their long-term future as a trader.
Anyone can get lucky once, but a trading career that is reliant on luck will be nasty, brutish and short.
Speaking of short careers, it also ignores the fact that successful trading is about the long game. It is about ignoring the constant murmurs and noise of the market and instead seeing the general trends and curves.
It is impossible to have a perfect record in forex if you are trading consistently; sometimes the market is down or something you could not possibly have foreseen happens which increases the volatility of a particular currency value.
Expecting quick success is not going to happen, and whilst you do not need unrealistic goals to have unrealistic time frames, setting yourself a goal that is essentially a moonshot is setting yourself up to fail.
Failure hurts more than success. Failure is discouraging and failure often causes traders, even those who have potential from a talent and knowledge perspective to give up early.
Trading is a high-pressure environment, and creating goals which rely so heavily on low-percentage scenarios magnifies these exceptionally strong emotions. This not only is awful for mental health, but it also leads to emotional trading, which makes all of the above far worse.
Tips For Setting Realistic Goals
It is all well and good knowing that you should avoid setting goals you cannot reach without a black swan event. It stands to reason that you should never promise what you cannot deliver.
However, actually setting realistic goals might not always be the easiest task in itself, especially for traders relatively new to forex and without the experience to understand expectations in the long term.
The first step, rather naturally, is to learn as much as you can about currency trends, both in terms of the pairs you intend to invest in, find patterns in the data and look at explanations for aberrations as well.
Forex is typically a market that moves very incrementally, so a lot of money is made through disciplined trades with realistic expectations that one half of the pair is set to fall and the other to rise. Know when the market is at its most volatile and exercise the most caution there.
Ultimately, as with any other discipline, forex trading is about continuous development. It is absolutely fine not to know everything before you make your first trade. Making mistakes and realising losses are part and parcel of the experience and the best traders at their best will sometimes do so.
Stanley Druckenmiller is one of the greatest minds in the history of forex, masterminding the biggest currency short of all time when he “broke the Bank of England”. And yet he lost $3b in just six weeks when he made an impulsive decision to get into the dotcom bubble an hour after it burst.
Setting realistic goals is about understanding that the process is often more important than each individual result, especially at first.
Ensure that every trade has effective and robust risk management practices attached to them, including stop-loss orders, diversification and position sizes appropriate relative to the makeup of your portfolio
Sticking to your trading plan, maintaining your discipline in trades and building a portfolio based on these principles will ultimately make more money in the long term than impulsive trades will, even if some of the latter end up making more money individually.
Credit yourself for following the plan even in trades that do not work as intended, and be critical of money-making trades made emotionally or impulsively. Over time, results tend to normalise, and this means that consistent, strategic, disciplined traders are more likely to succeed.
A trading journal can be really useful in this regard, allowing you to keep track of the dates, purchase price, sell price, quantity and any additional notes about the logic of any particular trade.
Over time, this journal and the practice of writing in it will be an invaluable resource that lets you see your performance, strengths and potential areas of improvement, as well as providing you with realistic outcomes based on your actual trading performance.
When setting goals, using the SMART criteria framework can be a really helpful practice to help you set goals that can actually be worked towards.
The five criteria in question are:
● Specific – the goal needs to have particular goals and particular desired outcomes. It cannot simply be “I want to make a lot of money,” for example.
● Measurable – the goal needs to be empirically defined. For prop firm traders, this will generally be a specified growth target within acceptable risk tolerances and drawdown limits.
● Achievable – the goal needs to be actually possible with the tools, skills, resources and time available.
● Relevant – the goal must contribute to a wider target and have a reason for being set and being achieved.
● Time-sensitive – there needs to be a timescale. Goals tend not to be helpful in perpetuity.
Sometimes it is best to break down your targets into milestone goals that also follow these principles. If you need to increase the value of your portfolio by a set percentage, what do you need to accomplish every week to achieve this? What do you need to do every day to achieve that?
Ultimately, setting realistic expectations does not just make traders more successful, it makes the process of trading more enjoyable by reducing the risk and pressure that comes with it.