In 1997, a study was conducted on taxi drivers in New York and it uncovered some very irrational behaviour.
On rainy days, the demand for taxis was much higher than usual, as you’d expect. Yet, the supply of taxis was much lower than on a typical day.
On the other hand, when the weather was good, demand for taxis was lower as people were happier to take a walk. But during these times, the supply of taxis was much higher than usual.
This strange situation raised some questions. Why were there fewer taxis on the road when they were in demand and more of them on the road when they weren’t?
The study found there was an economic rationalisation at play with the taxi drivers that was anything but rational.
The taxi drivers had daily income targets and as soon as they hit the target, they’d finish for the day.
This meant, on good weather days, they might be sitting there for a very long time without a passenger since there’s less demand. That meant they would work a longer day to hit their target. Whereas, on bad weather days, they might take one passenger after another and hit their daily income target in the shortest time possible.
This sounds quite rational, doesn’t it? But actually, when you think about it, it’s quite irrational. They should, in fact, be doing the complete opposite!
If it’s a slow day and they are having to wait around for a long time, they should finish the day early and spend their time doing something else. If it’s a busy day, they should work a longer day to maximise their earnings and take advantage of the better situation.
Overall, this would mean they would be spending less time working for the same, or higher, levels of income.
How can we apply this thinking to our trading?
Many traders set daily or weekly goals based on achieving a monetary target or a certain number of pips in profit.
Just like the New York taxi drivers, this means you would be working a shorter day when the markets are offering the best conditions for your trading and grinding out a long, tough day when they aren’t.
Instead, if the opportunities in the markets are coming thick and fast, you should be working a longer day and cutting your day short when the conditions just aren’t right.
When it comes to trading targets, there are also other psychological factors at play.
If you are struggling to hit your target due to losing trades or simply not finding enough opportunities, this is going to reduce your ability to execute your trades according to your system. You will begin to get frustrated, worried and impatient. This may lead to you forcing trades, revenge-trading, overtrading and a number of other actions that could sabotage your results.
Instead, you should be trading more on the days when the opportunities are coming thick and fast, and ending your day early rather than sitting there frustrated on the slow days. If you’re frustrated and feeling impatient, you’ll only end up sabotaging your trades by accident.
Another point to consider is the rate of ego depletion and decision fatigue you may encounter. If you are struggling with a long, tiring day with difficult market conditions, your ability to make high-quality decisions is going to diminish. This means you’ll be dealing with a tough market with sub-par decision-making abilities.
As you can see, setting trading targets based on hitting a financial or pip target can actually end up doing more harm than good. Instead, we should adjust the hours we trade each day based on the market conditions at that time.
However, setting goals for your trading is very important, but they have to be done correctly. Check out the video below to find out how you can set better targets that will lead you to success.