Why Smart Traders Think Differently About Their P&L Curve

There are many ways traders sabotage their own performance. A common one is not fully understanding this key principle:

Different trading approaches lead to different types of P&L curves.

A good trading approach should lead to a rising P&L curve over time. But it's just as important to understand how it gets there.

When most people think about becoming a “consistently profitable trader,” they picture a smooth, steadily rising P&L curve with only minor dips along the way.

But that’s not always realistic. A trader can also be consistently profitable with a lumpy P&L curve.

My favourite example is how black swan funds use antifragile strategies, designed to profit from massive market disruptions. These funds expect years of small losses, then capture huge gains when market shocks hit.

Universa Investments reported a 3,216% return in March 2020 with their tail-risk strategy. For five years before that, black swan funds consistently reported annual losses. They don’t panic or abandon the strategy in those down years because they know it’s part of the plan.

Your trading might not be as extreme as a black swan fund, but you could experience similar P&L lumpiness on a smaller scale.

For example, many traders aim to capture big market moves with high risk-reward opportunities. In those cases, you can expect a lumpy P&L curve, with periods of drawdown while waiting for a profitable trade to give you the next leap up in your returns.

Let’s say your trade opportunities are usually higher than a 1:10 risk-reward ratio. Even with a great edge, you’ll hit losses far more often than profits. But unlike black swan funds, most traders start to panic during these drawdowns. They start worrying that they're in a losing streak or that their P&L isn’t smooth enough to be considered 'consistently profitable.'

As their mindset shifts, so do their decisions.

When they finally get a profitable trade, they often close it early to claw back some of their previous losses. This undermines their approach, stopping them from achieving the big gains needed to boost their P&L.

I stress this point with our members, especially when someone is transitioning to live trading. They often wonder why they only seem to end up with small profits and miss out on the big moves. Here’s what usually happens:

1. They follow our method and make logical decisions for the entry.
2. As soon as the trade moves into profit, they start thinking more about defending that profit than making logical decisions for the opportunity.
3. This causes them to be too reactive to price moves, and too defensive at key decision points.
4. They scale out too much, tighten stops too early, and exit trades too soon, even while the opportunity still has potential.

Ultimately, this makes it nearly impossible to capture runaway profits. So their returns stay marginally profitable each month, and they become frustrated.

All that's needed is a shift in perspective about what to expect from your trading approach and what that will mean for your P&L curve.

Here are some important things to think about:

• What type of P&L curve is your approach likely to produce?
• Is it currently producing that type of curve? If not, why?
• What actions can you take to change that?
• Does this approach genuinely suit you? (If not, you're likely to self-sabotage).
• What type of approach might fit you better?