How expectations affect our decisions and results

Those who have no expectations will never be disappointed. It sounds simple, but the reality is that expectations influence our decisions and how we perceive our successes or failures.

In the third part of our series discussing the psychology of trading from our trading psychology course, we'll talk about how expectations can influence our approach to trading and how to set our goals to be successful in the long run.

Perhaps everyone who started trading had certain expectations and motivations from the beginning. That is why the first part of this psychology course starts with a questionnaire about what your expectations and motivations were when you started trading and how they have changed with experience.

What are expectations?

An expectation is a strong belief that something will happen. It's a common, natural thing that occurs whenever we start something new or a new event is coming up. And it is the same with trading, where beginner traders have certain ideas and expectations. Unfortunately, in most cases, these expectations come down to the idea of a few clicks that will make us millionaires and we'll be sipping Piña Coladas by the pool.

This is of course helped by social networks and advertisements that present trading as a way to get rich quick. Since this is in most cases the first information we get about trading, it is easy to believe. Only after a while do we find out that it is a tough business that requires a lot of time, learning, energy and discipline, and even all these skills may not mean success. Later on, frustration sets in because of unmet expectations, or because our goals are not coming to fruition as soon as we expected. It's not uncommon, this experience is felt by the vast majority of traders, although on social media it sometimes looks different - because no one brags about failures and setbacks.

In trading, everything is the opposite

There is one more problem with trading, and that is that many things work in the opposite way to what we are used to. In other activities, such as working 9 to 5, or even in sports, for example, the more you engage in the activity, the more likely you are to be successful or make more money. In trading, however, more activity can lead to the opposite. Often, less is more. Patience and restraint, or not making uncertain trades that are not completely in line with your strategy, can lead to better results than overtrading unnecessarily.

In trading, it is important to spend enough time preparing, backtesting and fine-tuning the strategy, which leads to gaining confidence, which is then important in trading. And also to the belief that trading at any cost and every day can be counterproductive. The need to be productive and proactive proves beneficial in all other instances, but not in trading.

In trading, however, it is necessary to count on the fact that even with a disciplined and patient approach, we will experience losing trades. Conversely, profitable trades may not always be those that are perfect. Sometimes a trade can end up in profit where we have broken the rules, and such trades can be dangerous and should be avoided as it is an unsustainable approach.

Expected result

In addition to the expectations before trading, it is also important to be aware of the expectations when executing trades. This can influence our attitude towards the execution of the trade itself. This is because if we expect trades to end in a loss, we may tend to close them too early. If, on the other hand, we believe in profits, this can lead to pushing the Stop Loss into a larger loss if the price moves against us (because we believe that "it will turn around").

To avoid feeling frustrated, we need to be prepared for two scenarios when opening a trade, or have a Plan A (profit) and a Plan B (possible loss). With proper risk management (with plan B), the loss may not be as painful. If, on the other hand, we only count on profit and do not have a plan B, we cannot estimate when is the right time to realise a loss and it can climb to unnecessarily high values.

If we were to go back to the previous part about our personality, the case where we expect only gains and forget about possible losses is the state of the child. But when we have set realistic goals and focus on the right process, we are in the state of an adult, which is where we want to be.

Goals can help and harm

In addition to different scenarios, we should also be able to set the right goals. These are very important in trading, but we need to remember that a goal can help us, but it can also do a lot of harm. Since it is based on our expectations, it is important to set them as realistically as possible.

We often tell ourselves that earning one percent a day is achievable. But is it truly realistic to expect daily profits or to rely on a flawless strategy? While that one percent goal may seem straightforward, unexpected setbacks or extended drawdowns can still lead to losses, even when we follow our plan perfectly. This is where frustration can creep in, tempting us to break our rules or chase trades at any cost. Ultimately, this mindset can leave us perpetually frustrated and, paradoxically, unable to trade effectively at all.

That's why it's good to set goals that we can actually work on, or focus on things we can influence. For example, tell ourselves that we're going to be disciplined about our strategy throughout the week and at the end of the week we'll evaluate how it went.

Let's be SMART

One method that can help us in setting goals is the rather well-known SMART method. In terms of goals, this means:

S - Specific.

M - Measurable

A - Achievable

R - Relevant

T - Time-Bound

In short, it is about making our goals achievable within a certain time frame. But what does that mean?

We find out the specific goal by answering six basic wh-questions:

Who - who will be involved?

What - what do we want to achieve?

Where - where do we complete the goal?

When - when do we want to do it?

Which - which obstacles might get in the way?

Why - why are we doing this?

Measurability will determine how we know we have achieved our goal.

Achievability means that the goal must actually be achievable for us to have the motivation to meet it.

Relevance means that the goal fits what we want and that it is consistent with our long-term perspective.

Finally, we need to set a deadline for achievement. This will help us have a better idea of how much time we have to achieve the goal and how much time we need to devote to it each day.

We can now look at our two goals from a SMART perspective. The first goal with one percent is specific and measurable, but it is no longer clear if it is achievable, who is in charge of it and if we have enough control over it (market conditions can change quickly).

Looking at the second goal right from the start, we may question whether it is a specific, concrete goal because it is actually hard to determine what it means to be disciplined. And a non-specific goal is virtually impossible to measure.

A good example, however, is setting a goal that we will execute no more than two trades per day for the next month because we have an overtrading problem. This is a specific goal that is easy to measure and relatively easy to achieve (in short, we will do none, one or two trades a day). The relevance of the goal is that we want to stop overtrading and the time limit is one month.

Similarly, from a SMART perspective, we can think about what our goal is as traders. Is it trading and making money? Is it really a relevant and achievable goal? Is it within our power to be profitable every month? The answer, unfortunately, is no.

Our goal should be to focus on the things we have in our hands. It's when we enter the market, when we exit the market, whether we stick to our strategy, manage risk wisely, whether we are able to learn from our mistakes. So if we want to avoid the frustration of unmet expectations, we need to set goals that are achievable, specific and relevant to us, because there is no point in being stressed about something we cannot control. Trade safely!