Take Your Lumps

One of the maddening things about trading is that it resists any and all attempts to turn it into a regular business activity. For most of us our greatest desire as traders is to achieve steady, positive returns that compound on a daily basis. But trading is not and will never be a job with the predictability of a bi-weekly paycheck because Mr. Market is unlike any boss you will ever have.

In the normal world of salaried employees we get paid irrespective of whether we are having a good day or bad one. In fact for may of us we can even play hookie, or call in sick and do no work at all and still get paid. At worst if we are commission based employees like salespeople, we simply do not get any cash if we perform poorly on any given day. Mr. Market however is a much more insidious boss. Not only does he not pay you on any day that you do not work, but he actually goes into you bank account and pulls out money that you already posses, the moment you make a mistake.

That’s a very disturbing reality for most traders to accept. In the real economy, only self employed business owners ever face that dynamic and even they experience it very rarely. For example if you were to run a coffee shop, your day to day business would be relatively predictable. It is almost inconceivable for a coffee shop owner to have 1000 customers one day and zero customers the next. The flow of business in the regular economy is generally steady. In the financial markets however the flow of returns is much more lumpy.

This notion became crystal clear to me when I was looking through a backtest of an intra day flow strategy that I trade. No matter what filters I applied there were just some months when the methodology did not work and it lost money. In others months it just printed pips with barely a bad trade in the batch. In fact I realized that the best you can hope for when you are trading is to simply dampen your losses as much as you can when the markets are not cooperating while staying in the game long enough to enjoy the winning streaks. Make no doubt about it, financial markets are very streaky. Most of the time prices bounce around in a state of indecision until a dominant theme develops that generates strong directional flows. Furthermore, because it only takes the press of a button to change your mind, the financial economy is much more volatile than the real one. That’s why a famous analyst once quipped that the US stock market predicted 9 out of the last 4 recessions.

So in summary the best we can hope for when we trade is not remain at breakeven for most of the time and make your money during the few months when the markets are trending. In finance unlike in real life, the payouts are lumpy and you need to learn how to take your lumps if you want to succeed.

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