What is profitability? It’s a simple question, a basic concept, but when I ask it of myself I find in reality it isn’t simple. Instead I find the term which for so many means so much to be a difficult one to define.
The definition at any rate is personal, it is individual and no doubt differs in ever case. I’d be interested to know how many people stop to consider what the term means for them, either before or after they achieve it. I remember once being in the audience for a talk given by a fairly prominent trading educator. He asked “What would you say make you a successful trader?”. Nearly instantaneously a hand was thrust excitedly above the flock of the conference attendees. “Fifty Thousand, STERLING!” called the hand’s eager voice.
I found it a bemusing reply. Sure we all have fancies in the early days about the riches trading might deliver but to have such an arbitrary response to such a not so simple question made me think. He could have replied “Fifty Thousand a year, that’s my salary and I’d like to match it through trading”. That to me at least would have been a more measured reply. He didn’t though, he just hit the crowd with a number. Was he supposed to make this in a year, a decade, a week, overnight!? It lead me to think because I felt it highlighted that a lot of people don’t properly consider the end goal of all the screen time and simply get fixated on numbers. How much can I make? How long will it take me to make X amount?
Aside from considering what will define you as a success, I feel sitting down to define what will define you as profitable is an equally if not more important consideration. At least to my mind once you become profitable, success is a much less daunting proposition. The weight of work, knowledge and experience at the point of profitability are firmly now in your favour, confidence improves and success becomes the next logical and much more likely probability.
Before profitability however, success is just a notion. A far from certain hope that we have no real idea will ever come. Conversely being pre-profitable is a very real existence, an uncertain one, one where we are vulnerable and exposed to the elements and to the harsh realities of repeated losses and mounting self doubt. Like a poorly purchased Option, time decay eats away at our position as a prospective trader until we inevitably yield to the forces that conspire against our success.
This is why I think it is so important to define profitability because I feel it is the only head mark we should concern ourselves with, it allows us to guard against that face and keep us on track. Without that definition everything else is just hyperbole.Easy definitions don’t cut it for me either. More winners than losers or winning more than I lose you might think are the obvious choices, but I still feel they are too subjective. Over what time frame? How frequently? Having more winners than losers AND winning more on them than what’s lost on losers is progress but still it doesn’t complete the picture.
The picture is complete when you have a definition you can confidently say you’ve achieved that enables you to objectively identify you are indeed in a state of profitability, so you can reassess and focus on the next, more grand goal. You want to be able to know concretely that you are in a paradigm of profitability, or at least that’s my view.
Originally my goal for 2017 was to survive the year with my account intact. I’ve since realised this is a ridiculous goal, and an easy one. Want to survive the year? Just don’t trade, that’s what I was starting to do! I started to change my approach to trading, even how much I was trading in order to satisfy my goal. A goal that in the long term was going to do nothing to gaining experience or to achieving the next goal of actually making some money!
Some may think all this chat about defining profitability is rubbish, that it’s not required and for them it might not be, thats cool. A huge step towards making progress though is identifying how you operate, what it is that you as an individual need. One of the reasons I started writing this blog is because my mind makes much more sense of things when I sit and write, writing is a sort of replay of ideas that helps catalogue things. Some people like spreadsheets for analysing trading, I like writing. That’s why I like the idea of defining profitability.
Profitability for me is a goal, it’s THE goal. So what is my individual vision of profitability? My first criteria is activity level. Life and its commitments mean trading often takes a back step, so I trade less, login less, study less. In these periods I find everything goes out the window. In order to be profitable I need to be active in order to feel I have consistency and to me being active is trading at least two days in a week in any three week period. I won’t put a minimum number of trades as a criteria because I only trade the Treasuries and I might just not get enough opportunities.
Second is losses. Losses must be contained and so trades must be taken with good risk reward characteristics. Third is simply the bottom line, if I come out the end of an active trading period with a positive balance after commissions and fees then that’s what I’m looking for.
So here it is, for me profitability is:
To have achieved a net increase in account value after commissions at the end of any active trading period. An active trading period will be defined as me having participated in trading in at least two trading days per week over a three week period. In the interests of robustness in order to be deemed initially profitable I will need to have met the conditions of being profitable for three consecutive months.
So there you have it, my personal definition for profitability. It reads like an aviation Ops Manual so has the air of authority about it which personally I like, it also is fairly easy to measure myself against, I’ll either meet the criteria or I won’t. Devoting the required time and resources to making progress in my trading journey is the biggest challenge I face day to day and I think this definition caters for that.
Do I have a time target for my goal? I’m on the fence as to whether they are beneficial or not. On the one hand I think there is a temptation in our world to want things too quickly, to believe the self help spin and set unrealistic time goals but on the other hand it almost definitely helps when you know what you are shooting for. So I will set a time target on this, loosely though. I’m going to say that I’m looking to have achieved my defined goal of profitability by this time next year. That gives me a year to get better at making time for trading which is the only way to build the screen time required to succeed.
If I haven’t achieved it by then, well then I’ll cross that bridge when I come to it, I probably won’t quit though, because I’m stubborn like that!
As ever, thanks for reading.