Habit 4

Don't overtrade your account. Trade in correct proportion to your capital. Have realistic expectations.
One of the most pernicious roadblocks to success is a manifestation of greed. Trading is attractive precisely because it is possible to make big money in a short period of time. Paradoxically, the more you try to fulfill that expectation, the less likely you are to achieve anything.

The pervasive hype that permeates the industry leads people to believe that they can achieve spectacular returns if only they try hard enough. However, risk is always commensurate with reward. The bigger the return you pursue, the bigger the risk you must take. Even assuming you are using a method that gives you a statistical edge, which almost nobody is, you must still suffer through agonizing drawdowns on your way to eventual success.

The larger the return you attempt, the larger your drawdowns will be. A good rule of thumb is to expect an equity drawdown of about half the percentage of your annual profit expectation. Thus, if you shoot for annual returns of 100 percent, you should be ready for drawdowns of 50 percent of your equity. Almost no one can keep trading their method through 50 percent drawdowns.
It is better to shoot for smaller returns to begin with until you get the hang of staying with your system through the tough periods that everyone encounters. An experienced money management executive has stated that professional money managers should be satisfied with consistent annual returns of 20 percent. If talented professionals should be satisfied with that, what should you be satisfied with?

Personally, I believe it is realistic for a good mechanical system diversified in good markets to expect annual returns in the 30-50 percent range. This kind of trading would still result in occasional drawdowns up to 25 percent of equity.