Let's consider two traders (A & B) Trader A loses money for months or years. While he loses money he experiences a thousand AHA moments. He then integrates all this AHA moments and becomes a consistently profitable trader under all market conditions. Trader B makes lots of money consistently under particular market conditions/structure. Then when the market structure changes (like NYSE going hybrid), the trader can no longer make money (either not enough to want to continue, not as consistently, or the risk no longer justifies the return). Now you can't judge progress by P/L #s alone as the #s can lie for a long time as trader A loses consistently then masters trading and trader B wins consistently then can no longer make money. So how do you know if you're making progress or not if you can't judge by the P/L #s alone?
Trading is a competitive sport. In other sports like golf, tennis, or basketball - you learn a technique - then you master it thru disciplined repetition. But in trading - you learn a strategy - then you master it thru disciplined repetition - then the market changes and the strategy becomes suboptimal (return not justified by risk). How do you master a sport where the rules change constantly?
"So how do you know if you're making progress or not if you can't judge by the P/L #s alone?" I think this is a specious conclusion because you are taking a fixed point in time (now) and asking about progress (a changing condition over time). Jesse Livermore was extremely successful - up to a point in time. He lost it all in the end (a point in time). When you stop trading, you fix the point in time as a conclusion and the P&L at that point states success or failure, monetarily speaking. So if both traders stop at the moment you describe, then the one with the greater account wins. The loser did not learn to adjust - or you did not give him time to adjust before reassessing who "learned more".
The market rarely changes drastically overnight. OK, decimalization, the hybrid, and major structural changes, but generally the changes are slow and you can see them as they're coming. That's why you have to be continually in the market to see the changes so you can adapt. When something like the hybrid comes, you have to realize that no one else knows what to do either, and make your goal to figure out what inefficencies exist that can give you easy money. There are several, and were several more once all stocks became hybrid. Sports evolve, too. When there's a rule change, you figure out how it will affect the game and realize everyone else is effected equally. Otherwise, you slowly see how different teams play and how coaches are changing tactics and you adapt accordingly.
Great OP. This can be the thread of the month. I looked at the Far Side cartoon for today and had two laughs: the cartoon and why aren't there two shoe boxes? A fast animal is putting on 2 sneakers to go catch another animal from the nearby herd. He has four feet. This is my contribution with regard to the topic. A traders progress is measured by a common standard available to all traders. There is but one standard: the market. And the standard is always right and always there. Neither trader A or B is going to be showing much progress over time by this standard. Both are just going to be marginal and like the sample in the recent Clinical Study of Day Traders. The market offers. This offering is the standard. The narrowing of the trader's equity curve, asymptotically to the market equity curve of offerings is the measure of progress. The lessening of the difference of the two curves is the measure of progress. Since this is the standard, then it is incumbant on all traders to continue to perfect their performance by ranking a set of objectives that are specifically designed the knock off serious chunks of the existing difference. I hope it get very obvious to ET members that there are a herd of elephants represented by these chunks that need to be knocked off. Purposeful work on each of these chunks is called for at all times. 1. Traders A and B have never seen the markets. Fix that. If you do not have at least four platforms running, you are not seeing the markets. 100,000 lines of code doesn't do it either. 2. You have to be on the right side of the market when you are in the market. If you can't see the market you can't see the right side. One continuous indicator measures the sides of the markets. It is the sentiment indicator. Neither trader A or B have a display running continuously of the sentiment indicator. Graph all losses as a line on the equity graph. This shows where the sentiment was not measured correctly. Color the area under the line and above the horizontal axis; it is the money forfeited by losing while on the wrong side of the market. 3. You have to be in the market to make money. Calculate the % of the time you are in the market. Use 100% as the base beause the is the % of time the market is offering profits. the task is to design a trading approach that takes 100% of the opportunity. All of the times you are presently not in the market and it is offering money is an indication of the amount of progress that is on the table to do. Draw a graph representing the % times the standard + the height of 2. Color the eara between the two lines; it is the equity forfeited by being on the sidelines. 4. You have to not make errors is switching sides of the market. The remaining area between the market offering standard and the sum of 2 and 3 lines is largely timing errors doubled. Divide the vertical didtance in the space and draw a "timing" correction effect. This is the "putting" phenomena. you could be on either side of optimum. Here the topic is effectiveness and efficiency of trading and it is measured to become optimum. Notice that there is no probability or betting or money management or protection as part of this. the standard of progress in trading is how a trader can recognize the correct strategy (neither A nor B has anything remotely related to strategy) and perform that strategy. If trader A or B had anything like a stategy that would have been said. Most often in any post what is not said is the important consideration. Why is a person unable to see the standards of trading? Why do not people work in purposeful ways? Why haven't most people ever seen the markets? This is just simple run on copy nor reread or edited. It is just a simple way to make a simple graph. I just made it up as I went along and made sure I covered the big elephants as a starter. No one will do any work to make a graph. No one will figure out what the market is offering. no one has a display that shows the market; it takes four platforms and that would be too expensive...lol. No one does anything to get more time in the markets; they just watch the pipeline flow to others and let it pass until they are broken and have to quit trading. Optimizing....effectiveness...efficiency...these are so far out on the hozion a cheetah with for snekers on couldn't catch them they are running away so fast for most traders. 90% daytrading failure rate. Most people never have any forward progress in the first place. Trader A and B didn't have any. Zero out trader A aha's he doesn't get it at all. The level of profits he is making probably look like the performance of LBR respondents (See table 3).
How do you explain Livermore? You'd think a guy that knows all the ins and outs of the market and has 20+ years experience would never blow out. And since he did blow up then add up all his 'progress' over the years and it adds up to nothing. How do you explain the persistent under-performance of institutional traders compared to a buy and hold strategy on the S&P 500 over any 10 year performance. And I'm talking about the institutional traders that survive and still under perform. For every one fund that survives, 5 get shut down. What does their progress amount to? Consider a very intelligent long time poster on ET that had a very consistent record then blew out last fall. What does his progress add up to? How does one get 10 years of experience out of 10 years of experience? Instead of just repeating year 1, 10 times over.
Whatever all these folks are doing, they are barely this side of random. Look at this equity curve simulator. http://www.hquotes.com/tradehard/simulator.html Set it up to simulate 100 different accounts with random strategies. That would be win/loss 1, win prob .5 and lines qty 100. Some accounts would be doing great and the guys saying "I've got the HG" and some would have failed and dropped out. That is where the big majority of people, amateur and pro, are at IMO.
Increased comfort, increase confidence, and increased consistency is what its all about. Hard to quantify comfort and confidence. Slow and steady wins. It is said that most people overestimate what they can accomplish over a short period of time and underestimate what they can accomplish over a long period of time.
When just looking at Entries and Exits, yeah, you're right. So the trick then, to successfully trading for a living, is in the money management. Good trading, JJ