Imagine the classic bell curve…
Then think about the top 1% “tail” at each extreme…
On the right we have high accuracy traders, who make tons of money by flipping tons of lots. Their risk to reward ratios are low, but their accuracy is high. Each losing trade wipes out a few winners, but the losses are far and few between.
On the left, we have the high risk to reward traders, who make tons of money by carefully selecting and filtering trades that offer small risks but huge rewards. Their risk to reward ratios are large, but their accuracy or trade frequency is low. They rarely trade, because their filtration methodology keeps saying “not yet”…but when they do take a trade that wins, its a big payday and their wins wipe out many losers.
They are both VERY VERY profitable, but to ask which is better is not really the appropriate question.
It would be like asking if it would be better to own a McDonalds or be a high end real estate agent? The Mcdonalds makes only a tiny amount of money per transaction, but they do a TON of transactions each day. Each day there are profits and the level, size, scope of the profits are consistent and forecastable. They make money on volume not margin…
Now on the other hand, the high end real estate agent rarely sells a property, and spends a lot of time communicating with and courting prospects. BUT! When a sale goes through they make a BIG check, and this huge influx of money allows them to budget and spend from funds available.
The boom/bust (real estate agent) model will have times when the market is hot and they will make bank, then there will be lean years when they need to lean on their earnings to get through the tough times.
The McDonalds owner will have some ups and downs too, but they will be buffered by the order flow, and the odds are super low that they will have to reach into savings to survive a downturn. This steady state model will never get hot and make you rich overnight the way the boom/bust model will, but it WILL make you rich exponentially as you make profits and invest them in new locations over time.
See where I am going here? In my experience as a trader and teacher, the steady state style is better for compounding, bootstrapping and is easier for a newbie to learn, execute and gain confidence with. If you have $500, it is totally possible to turn that into a 6 figure income in 2-3 years. We have one student who did in 1 year.
But, once you get up to steady state, why not have both? You will have the the steady weekly income stream of the high volume trader, and then the big booms of profit when the rare but rich boom/bust trades show themselves. If you take a high r/r trade and it stops out, the steady state style gains will help fill in the drawdown while you wait for the next opportunity.
Just like most human endeavors, most participants don’t realize that peak performance lies in the “fat tails” of the behaviour/skill/strategy bell curve. They go for the median, the vanilla, the “safe”, the conservative, the “normal” and eat the bulge there in the middle.
So get out there on the bleeding edge and get extreme, and watch your compounding efforts rise up on steroids!
Questions?
Comments?
Good luck and good trading!
-Bo Yoder
