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Jul 24

What The Heck Is Consistent Profitability?

Categories:

General Trading, Systems

by Rogue Traderette

I don’t know about you, but I have never just rocked up to a random business owner and asked them to prove to me whether their venture is profitable.

it simply never crosses my mind – and quite frankly it’s none of my business, so even if I was immensely interested good manners would probably prevent me from asking.

So it astounds me a little when strangers are perfectly happy and comfortable asking me whether I’m consistently profitable, and more than that, asking me to show my stats which are essentially my personal business books.

Now I’m an open book kind of girl, and am happy to share my trading endeavors but to ask if I’m consistently profitable is pointless and a waste of time, and here’s why.

What looks consistent to you is not consistent to me.

For example, I’m experimenting with short timeframes at the moment, but on the whole am a medium term equity trader.

And it’s quite possible, as my recent testing showed, to have a losing year in a daily system yet be consistently profitable overall.

But if you are a day trader, and I told you I was consistently profitable yet had a losing year, you would think I’m mental and a liar – not about the losing year, I’m sure everyone would believe that, but about being consistently profitable.

For a daily or weekly trend following system in a predominantly sideways market it would not be inconceivable to have consistently lost money over 2 years or more, even though the system is profitable over time and everything has been implemented correctly.

Consider this, which I stole from Ivanhoff’s piece on some cool Hedge Fund Wizard quotes.

I consider my pattern of taking quick profits in 2009 a dreadful error that I think came about because I had lost a degree of confidence due to experiencing my first down year in 2008.

Now I haven’t read the book yet and don’t know who the trader is, or what his timeframe is but would you have the nerve to write him off as a non-consistently profitable trader because he had a losing year?

So what the heck constitutes consistent profitability?  6 months?  A year?  10 years?

For me, it’s way longer.  I think of consistent profitability as the ability to earn some kind of reward from trading over a really long period of time.  It involves being flexible enough to change with the market, and try new things when the need arises.  It involves being able to trade through major bear markets and come out the other side relatively unscathed at a minimum.

When I think of consistently profitable traders, I think of people like Peter L. Brandt, people who have years of experience, an established track record and longevity in the markets.

If you’re asking a daily chart trader if they’ve been consistently profitable after 3 years, I’m sorry but you’re delusional.  Rather than asking a trader with sub 3 years full-time experience about their profitability, try asking them about their trading consistency instead.  Because without the ability to consistently implement their plan, profitability will never get a look in.

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  • Markus_paa

    LOL – It seems my question in your last post stirred something up.
    You are right, one can argue about the length of the timeframe for the measurement and this depends in turn on your trading timeframe. But if you take the number of trades which are all based on one strategy/approach you should be fine with 100-500. Therefore it might be better to look at the sample size (number of trades) and not at the timeframe.
    Btw. in Europe and the US it is not impolite to talk with business owners about their biz. You don’t exchange confidential stats and talk about tax payments, but most people tell you if the biz goes well or is not very profitable. If some people get angry about such a question it often means they are quite frustrated with their buisiness operations.

    • http://www.roguetraderette.com/ Jessica Peletier

      Maybe that’s a cultural thing then – here, I would happily talk to a friend or acquaintance but online to the whole wide world, not so much :)

      Mainly though for the reasons mentioned above, that things can easily get misconstrued.

      Also, I had the complexity of 2 systems/accounts, one big and one small where the small trading acct profited hugely, the big investment one drew down a little and overall ended net negative. So profitable or not? In percentage terms I rocked it, but in dollar terms not. In system terms both performed within the range of normal and expected.

      So while I’m absolutely happy with that, ‘people’ would be quick to rip me down and quite frankly I don’t need that noise :)

    • Max

      I don’t think there are a lot of people who have a problem talking about their business, it is when someone asks them to prove it that the issue starts. For example you could be blogging successfully when someone asks how your going. You say its going really well and that you have done this and that so far and have been consistent. They then want more information and when you don’t give it to them they start their rants. I have seen it more than I care to say. Successful journals, blogs etc that attract a gathering who want to know your system. From a business point of view that is the same as asking how you go about being successful day by day and instead of giving them the short answer they want the actual plans, mission statements etc.

      So from your statement I would agree that not just the US and Europe but in most places you will find CEO’s and company Directors/Management who are happy to shine some light on their business, but there is a line that is there that they will not overstep, I mean why should they. They have devoted so much time and effort into getting the business to the point of being successful, why would they just hand the information out to a stranger. If you had a trading plan that you spent 5 plus years working on and perfecting, would you give it away for free to just anyone who asked. If you say yes then your either a liar or a fool or perhaps both.

  • http://trendfollower.wordpress.com/ Bevan Lewis

    Yes it is a bit of a subjective term, and means different things to different people. A lot of the Internet marketing Forex trainers/bots claim traders should be achieving month after month of steady profits. For me it is achieving the potential expectancy of my system, which over a three to five year horizon will generate a substantial profit that will exceed costs. This is achieved by having a tested robust system (which is a long article in itself!), and executing it without mistakes (missing trades, disobeying risk parameters etc).

    Obviously the period over which you need to make a profit changes depending on your time horizon. Even day traders might not expect a profit every year – they might follow their rules but volatility in the S&P or whatever might be too low for a period. They probably need to be a lot more agile in looking at the markets they trade etc.

    Personally though I feel more comfortable trading a basket of instruments consistently and taking the ups and downs. I think jumping from system to system and instrument to instrument tends to lead to ‘chasing one’s tail’.

    • http://www.roguetraderette.com/ Jessica Peletier

      It’s to do with sample size – for a daytrader it’s going to happen relatively quickly – they might put on 500 trades or more a year which should give them good feedback, but it can take way longer for a daily trader, who might take 5 years to achieve that trade count.

      • James Edwards-Marche’

        Agreed. It’s not so much the time as it is the sample size- the lower the time frame used, the more trades we can generally expect to find per X period of time.

        This means one can find out if they are “consistently profitable” in literally any period of time from days to decades.

        MM

        PS Hi Jessica :)

        • http://www.roguetraderette.com/ Jessica Peletier

          Hi! :)

  • http://twitter.com/jim_trader Jim the Trader

    You are allowed to have your own definition of consistent profitability (Check you tile for that type by the way, it is consistent, not consistant).

    However, professional traders have a well-defined notion of consistent profitability. You must make enough to cover cost and be able to stay in the market. In this respect we know who is not consistently profitable.

    In the hedge fund industry, consistent profitability means to make more that some index, year after year.

    Obviously, if you start with 100K and you lose 90K and after 50 years you make 150K you are not consistently profitable.

    • http://www.roguetraderette.com/ Jessica Peletier

      Agreed – by long period of time, I mean regularly pulling profits, not one lucky lump :)