Profitable Traders Are Not Consistently Profitable

Every newbie trader wants to “arrive,” to be successful, to “make it,” to get to that point where they can make money consistently enough that they don’t have to rely on other sources of income.

Their ultimate goal is to be consistent. The problem is good traders are consistent with their methods, but their results are inconsistent in the near term.

This sets up a conflict for newbies – wanting to be consistent even though it’s not realistic and not characteristic of good trading.

AN EXAMPLE

If a profitable trader makes $125K per year, he averages $500 per day, plus or minus a little, or $2500/week, plus or minus a little. But it’s not plus or minus a little, it’s actually plus or minus a lot. The standard deviation of a trader’s day to day and week to week profits is pretty big.

The average might be $500/day, but in reality, it’s more likely a day trader makes $500 one day… $2000 the next…then he’s down $400…then up $600…then down $200. At the end of the week, he’s up $2500, but his day to day results were hardly consistent. He had one big up day and the others produced a small profit. This is normal, so this is what a day trader should strive for and expect; swing trading is the same.

A swing trader may make $10K one week, $5K the next and then fight like heck to just to make $5K over the next month. At the end of two months, he’s up $20K but it would be very inaccurate to say he averaged $2500/week.

A day trader will often have one trade out of many that makes his day, and one day out of five that makes his week.

A swing trader will often have one week out of four or five that makes his month and a couple months that make his year.

This is normal, so expect it. And knowing this will help accurately set your expectations so you aren’t frustrated during perfectly normal dry spells.

POKER

Think about it from a poker player’s perspective. A good player that advances far in tournaments doesn’t consistently win hands. In fact he only wins one out of every four or five or six hands. His goal is to survive and not lose much when he’s dealt bad cards but then to make a killing when he has good cards or senses a good opportunity. Trading is the same.

BASEBALL

Here’s a baseball analogy to drive my point home. Chris Davis led the major leagues in RBIs this past season with 138. This averages out to 0.87 RBIs per game. The assumption is that he consistently had 1 RBI in most games, and there were few 2- and 3-RBI games to counter the games he didn’t drive in any runs. But this is far from what actually happened.

Of the 159 games he played in, he had 0 RBIs in 79 of them. Think about that. The guy led the league in RBIs, yet he had 0 RBIs in half his games.

And he had 1 RBI in another 48 games.

That means 127 games (79+48) produced a grand total of 48 RBIs, and only 32 games produced all the rest.

The reason I use RBIs as an analogy is because it’s so similar to trading. In baseball you are given unequal opportunities to drive in runs. Sometimes you get up to bat and there’s no one on base, sometimes there are runners on 2nd and 3rd.

Trading is similar. You are given inconsistent opportunities so expect your results to be inconsistent. Sometimes the market is easy, other times is just gosh darn hard to eke out a small profit. Sometimes breakouts work great, other times they fizzle soon after triggering. 

ANOTHER BASEBALL ANALOGY

A player who hits 0.333 for the season doesn’t go 1-for-3 every game. Instead he goes 3-for-4 one game, then 1-for-5, then 0 for his next 7, then 1-for-4, then 1-for-4, then another hitless streak (0-for-8), and then he busts out of his little slump and goes 3-for-5. At the end of the season he’s hitting 0.333, but his game to game results were anything but consistent. Why? Because he has strengths, and he was weaknesses. He’s good at hitting fast balls from right-handers but not good at hitting curve balls from lefties. His results will vary based on who’s pitching.

Every trader has strengths and weaknesses. When your trading style is in synch with the market, a good trader will take advantage of the opportunities. When not in synch, a good trader will know “when to fold ‘em” and patiently wait.

WRAP UP

It’s important to keep your expectations in check, to have the proper frame of reference. Over the long haul you want to be consistently profitable, but do not strive for consistency in the near term. It’s impossible given the constantly change environment and opportunities. It’s ok to have a bad day or bad week or to lay low for a period until the trading environment improves.

Successful traders know the market hands them unequal opportunities, so they don’t expect their results to be consistent. You shouldn’t either. Just a like a good poker player, your goal is to survive when times are tough and take full advantage when great opportunities are offered.

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Visitor - HD: Great article! If the "consistently profitable" idea was explained in this way maybe more newbies would stick around.
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