The options to invest our money are increasing all the time, as are the strategies with which to do it. So how then do we select a preference between all the choices available to us? Well it all starts with quantifying your own objectives.

When we first come into the trading and investing game, our first objective is “to makes lots of money”! However, whilst that is an admirable goal, in actual fact what we discover with experience is that it’s the journey and not the end result that’s important. In other words, making money is only one part of the equation; we must also look at whether the method of acquiring wealth will fit with our own personality and lifestyle, otherwise it’s unlikely to succeed. Objectives then, need to be realistic and achievable and we need to ensure that the metrics chosen are ones that we can personally handle.

In trading and investing, these metrics fall into five main areas.

Risk

Before even thinking about how much money you want to make, you should always consider how much you are willing to put on the line to achieve that. This should be quantified as the amount that you would be willing to see your account drawdown by and still be able to continue trading. For many people a figure of around 20% will keep the sleepless nights at bay, but others can withstand more heat than that.

Return

This is the one everyone focuses on initially, but be warned – it is inextricably linked to risk. The more return you want, the more risk you need to take. Aiming for 100% return a year will easily incur “blow-up” risk. So when setting an expectation of return, it pays to be realistic.

Trade Frequency

This will largely be driven by your lifestyle and appetite for trading. It’s also linked closely with your time horizon. There’s no point aiming to take 10 trades daily during market hours, if you work full time. Conversely a system that trades only 2 or 3 times a year might not keep you interested enough. So aim for a trade frequency that’s realistic and that’s not going to impact on your other commitments in life.

Win Rate

Some people like systems that win 8 times out of 10 times on average. Others are satisfied with trading a strategy with a 30% win rate. But before plumping for a high win rate, you should be aware that this metric is also closely tied to expectancy. Profitable strategies with high win rates will tend to make less per trade than those with lower win rates. Therefore choose the best compromise that suits your preference.

Holding Period

Are you someone who like to hold for months or years at a time, or do you prefer to be all in cash overnight every night, or somewhere in between? The longer your holding period, the more of the market’s ups and downs you’ll have to ride, although in general this will be to achieve a higher expectancy. If you want to take less market risk, you will have to be content with a smaller expectancy per trade. This one boils down to your appetite and stomach for enduring that market risk.

Once you have quantified your objectives, you can then begin the task of looking for the strategy and investment vehicle that’s going to meet those objectives. These days we are faced with opportunities on a continuum from term deposits and bonds through stocks, real estate, CFDs, futures, foreign exchange and more. We can also choose from trend following, swing trading or seasonality as our trading approach. Each of these styles have different metrics and risk profiles, and it’s not until you have your own objectives figured out that you’re going to be able to ensure you adopt the right strategy to meet them.

In Part 2, we’ll look at how the metrics of various trading styles differ, and how we can assess each and match it to our own objectives.