Profitability: Understanding the Journey to Profitability

In this video Nick Radge talks about the journey to profitability. He looks at the difference between the equity curve of a long term trading strategy, a trend follower, and a short term trading strategy.

Part of the psychology of trading is the shape of your equity curve or the how journey is traveled.

I use the analogy of travelling from Sydney to Brisbane. We all accept that we might get caught in traffic when we leave Sydney. And that we’re going to stop for lunch. We know and accept it. And we therefore we always arrive at our destination.

But, because people don’t understand the journey of trading, most people don’t arrive at their destination, which is profitability.

Understanding the journey is understanding how a different trading system will impact your equity curve.

Trend Followers

A trend following system will have a low win rate. So you’re going to have a period of time where not much is going on. My account can be stagnant for two or three weeks with nothing going on. Up a thousand dollars, down a thousands dollars, Up a thousand dollars, down a thousands dollars. Most people think this is garbage, and turn the system off. The journey to profitability is a slow and steady race.

But then it will suddenly go bang! You’re out the top.

Trading success comes in fits and starts. So if you understand what the journey is going to be like you will more likely stick with it.

Short Term Traders

For short term traders your goal is quick profitability; just to bank money. Week in, week out, your goal should be just to bank money. Doesn’t matter if it’s a dollar, ten dollars, a thousand dollars, if you’re trading for an income, you’ve just got to bank money.

A very close friend of mine, very successful trader, he doesn’t care how much he makes on each trade so long as his equity curve keeps going up. Week, after week, after week. It doesn’t matter if its up by a hundred bucks or in his case, 25,000, 30,000 dollars, it just has to go up.

I’ve always had a problem, if I get off a trade to bank the money and watch a trend continue, I get really annoyed. But he just overlooks it and moves onto the next trade. And that’s a big psychological thing I’ve had to overcome,

So, different types of systems will have different journeys associated with them or different equity curves associated with them. Trend following systems will have a lot of small losses and they’re offset by big gains.

You only need one big win a year and you’re well ahead of the game. A lot of people come to me, and say they don’t want to wait six months for the next big win. Well I can’t tell you when the next one is going to come along, but I can tell you it will come along. If you’re there for it, you will get it.