Every trader has different needs, and knowing yours can help you to become a better trader. The first thing you should do as you start out the year trading is to pinpoint what those goals are and move them into your long term strategy. Every trader, even the ones with the shortest term focuses, should have long term goals, and if you don’t, perhaps this should be where you start. By identifying performance goals, you can ensure that you will be one step closer to achieving favorable results.
Looking at certain benchmarks can be a good start, but don’t be too concerned with how your portfolio performs against major indices like the Dow Jones Industrial Average or the S&P 500. Yes, these are great at measuring the health of the U.S. economy as a whole, and can provide a good frame of reference for comparing your performance against the economy, but your needs do not necessarily mesh with their performance. For example, in 2015 the Dow dropped slightly in value. If you look at your trades for 2015, and see that you beat the Dow, but still lost money after your trading commissions and fees, your year was not successful—even though you were better than the major benchmark. Your goal is to make money trading, so you should be focused on this regardless of what the Dow does.
Short term traders have a huge edge over the indices, so use it. Actually, traders have a few advantages, but for the sake of simplicity, we are focusing on the biggest of these—the ability to make money off of declining prices. It doesn’t matter what tools you use, whether it be selling stocks or ETFs short, using put binary options, or going short on a currency pair, you have many more tools than the Dow, which only takes long positions into account. So, while the Dow dropped in value over the year, if you had taken out a yearlong put option on it in January of 2015, then you would have crushed the Dow’s rate of return percentage wise on just a single trade.
Another thing to consider is the fact that indices do not take fees into account, while your trading definitely does. If you squeaked out a 1 percent profit in 2015, but lost an additional 2 percent on fees (not uncommon for low capital traders), then you’ve lost money, and you lost more than the Dow over the year. Yes, your trades were better than the index’s performance, but your performance wasn’t. Effectively, you lost money. You can fix this by reducing your trade costs. There’s no such thing as a free broker. Even binary options and Forex brokers charge money, although they do this in different ways than the traditional upfront fee. This is done by punishing losers, and rewarding winners. When you are successful in these marketplaces, the cost of executing trades is almost eliminated. You’ll still be wrong once in a while, so you will pay for this, but your overall fees will go down.
So, yes, you should have performance goals set aside, and they should be stated as a percentage, but using benchmarks like the Dow or any other index as a frame of reference is misleading. Even if you never execute a short sale or the equivalent in other markets, you can limit your exposure to the market during down trends, effectively making money when markets start out down, and having no risk when markets are dropping. This won’t ever be perfect, but the better your analysis skills become, the better you will be at predicting this as you gain experience. Optimum trading has nothing to do with the Dow, but rather your choices.