Should you think about profitability in your stock trading?

Trading is the biggest lesson in patience that you’ll have even more than kids.

The market doesn’t give us the profits when we want them. The market provides us with the profits when the market gives us the profits. The market doesn’t care whether we’ve had several losses in a row and want to win. Or whether we’ve been winning and want to keep winning. So we have to follow the process of trading the system and make sure that we’re making the right trades at the right size and adjust our capital and position size day by day. And it will build over time.

If you run a backtest in Amibroker from 1990 to today, look at the chart of the equity curve. Do you know how the equity curve grows? Don’t look at the 30 years and look at month to month and how it fluctuates. You’ll see that over several months, it’s common to go sideways or down, or up a little bit, then down. The only way you make money from the system is by following the system despite those short-term periods where it doesn’t make money because the winning trade will appear when you don’t feel that great about following the system. Even if you’ve got some open trades that are in profit and you haven’t closed them so you haven’t compounded the profit into the following trades. Those trades could grow and grow for months and still be open. That’s still real money and profit. It’s just not closed out and, therefore, not compounded into the next trade.

I don’t worry about what trades are open and closed, or how much loss I’ve locked in versus how much profit I have or haven’t locked in. I look at the account balance because the account balance feeds the backtest to generate the position size for the next signal that I’m going to take. As long as I know that I’m following the process each day and taking the correct trades, then I know it’ll build over time. We don’t want to get into the trap of thinking, “Well, I’ve banked some losses. I need a win now. I want to have a win to offset the losses,” because that will drive you to modify the system or ruin the system, bypass the system.

Remember to breathe and think that it’s normal. Run the backtest, look at the equity curve, and see what that does. You might be a little nervous when you realize that there could be months or years where that system doesn’t do very much. That’s going to work every day for six months and not getting paid because your boss doesn’t feel like paying you. But welcome to the market. We have to discipline ourselves to follow the rules and then allow the money to come when it comes. This is the psychological game of it.