Why Building a Trading Income is Difficult

Graybox Trading

Jan 03

Sometimes traders struggle with making any profits, and I have been there. But, if you have some edge then it tends to not be hard to make a profit over some period of time: days, weeks, months, or even a year or two. What makes trading hard mathematically is you have to keep the profit and build on it.

That’s why trading is so much different from a job. Day trading is more like if you did great at your job for 6 weeks, 12 weeks, or whatever and got well payed for it. And, then if you have a bad day and all your past profits are taken and now you owe money. Not many people are able to endure that.

Let me back up, a moment: good trading is almost always easy because it means the trader is in-tune with the market and finding opportunity. I tend to trade long side primarily. And, if I start to lose on the day– it often means there aren’t any good long trades to take. The easy side was short or flat.

As I see it, you must be able not just to consistently make profits but you must be able to accumulate profits with high certainty. There’s a big difference between consistently making profits and accumulating significant profits. As I see it, a trader has the highest chance of accumulating profits given the following:

  1. You have to only trade a significant edge. This is only really possible through systems trading or quantitative trading. Discretionary insight, market cognition, can be the source but markets are just too darn efficient.
  2. You have to be both willing and able to endure extreme drawdown. You have to give up part of the notion of consistent profits. You basically seek to provide liquidity or some variation of trading without a stop loss. Your return is some blend of trading skill and market return. Market selection, inventory management, and leverage management are very important. Importantly, you need rock bottom or commission free trading and maybe even a bit of luck.
  3. You only trade what is easy and when you have high objective confidence. So, how do you make trading easy? The trader needs a setup they know well or an easy to trade market or ability to really break down many possibilities for how a trade may play out. The problem is not finding easy to trade markets in the past: the difficulty is being able to find and identify in the real time.
  4. Along with the above 3 solutions, you have to get a better reward/risk ratio. The simplest way to do this is to trade longer time frames because on shorter time frames, it tends to be almost universally difficult to get very high R trades. I am thinking about catching a Tesla or Bitcoin or even a swing trader where you can pull off some large sized gains. Or look back to my “Simple Strategy to Beat CTA’s”. I suggested just to buy MSFT. Go back and check it out. I told you a simple strategy to beat the world’s best hedge funds, CTA’s, etc. And, if you did it– it worked. You beat at least 85% and perhaps 95% of traders. Why? Because Microsoft stock went up and held its gains. It’s that simple.

What may be important in any method is to seek out the “ground truth”. Seek out fact based patterns. To summarize, a viable trading methodology must be able to build on profits with a high degree of cumulative certainty: consistency is not enough.

The only get to build cumulative profits is to (1) hold through drawdowns and not take losses likely trading some sort of accumulation or liquidity provision strategy, (2) take trades with significant edge only– only trade large edges– by developing superior systematic systems or discretionary insight, or (3) trade on longer time frames where the R (risk/reward) can be naturally much higher.

About the Author

The author is passionate about markets. He has developed top ranked futures strategies. His core focus is (1) applying machine learning and developing systematic strategies, and (2) solving the toughest problems of discretionary trading by applying quantitative tools, machine learning, and performance discipline. You can contact the author at curtis@beyondbacktesting.com.

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