If you had no money and I gave you 100 Rs would you consider yourself financially wealthy?
Most people would say no.
What if I gave you 10000000 instead? Would you consider yourself financially wealthy then?
The answer is probably “yes”.
Therefore, this means if I kept giving you 100 Rs over and over again, there would come a point in time where one extra 100 Rs would be the difference between being wealthy or not.
The question is, what is that point?
This is known as the bald man paradox and it relates to a strange problem with newly profitable traders.
Newly Profitable Traders End up Disappointed
When traders start becoming consistently profitable for the first time, something strange often happens.
They become frustrated and disappointed!
The problem relates to the term ‘consistently profitable’. It’s usually treated as a destination to be reached rather than just another milestone in the learning process.
Part of the issue comes from the fact that the phrase ‘becoming a consistently profitable trader’ is thrown around tirelessly as if it’s the ultimate goal for traders.
It makes it seem like the progression for a trader is this:
1. You start off burning out accounts (losing 100% of the capital).
2. You then start losing a bit less than that each month.
3. Progressively over time, you lose a bit less and a bit less.
4. Then you finally pop through the break-even point into untold riches as a consistently profitable trader.
Why Newly Profitable Traders Get Frustrated
So traders have spent all that time learning. All that time losing. And finally they are making profits every month… but it’s only 1 or 2%!
“Was all that effort for this? Consistently profitable trading was meant to make me wealthy!”
The reality is, they’ve just made yet another marginal gain in their performance and there will be many more to come as long as they keep putting in the same effort. Increasing your average monthly returns from 1% to 1.2% doesn’t seem like much, but that will soon become 2%, which leads to 3%, then 4% and so on.
But instead of seeing the situation for what it is, they feel disheartened as the reality doesn’t match their expectations for this huge achievement.