Consistently Profitable Trader (CPT)

I first heard the term Consistently Profitable Trader (CPT) when I started my Prop. Trading training program with Velez Capital Management (VCM), my two-year attempt at being a professional day-trader in 2008 & 2009. There it simply meant: a CPT is a trader that can be relied upon to make more than they lose every day. Upon successfully completing their training program, each trader was given a very small amount of capital to manage. If the trader was able to grow that account, they were given more money to manage, little-by-little; and as their prop trading account grew, so did their (percentage) take of the profits earned. Potentially a very lucrative occupation for those with the skill to manage large sums of money. Problem is, it's very, VERY, hard to be a daily CPT; and it only gets harder as the size of your trading account grows.

In time, VCM went out of business; not because the business was unsuccessful, but because the two founding partners were unable to work together. There are other firms out there that have training programs like this, and most require their students to pay (a lot) for this type of professional training or come to their programs with a clear record of prior success. At that time, I also did some custom software development for them and got close to some of the senior managers. One day after dinner and some drinking, I learned some surprising facts about their business. Less than 35% of all trainees are able to earn daily CPT status, and less than 5% of daily CPT traders are able make any kind of a living day-trading, even after receiving excellent training, equipment and managerial support. Sooner or later, almost all day-trader wannabes eventually gave up. Most of the money earned by this firm came from training fees and the bonus profits from a small set of students and the very few semi-professionals that have right stuff.

In time, I figured out that CPT Status is The Right Goal because positive compounding is the real key to wealth creation in the markets; but day-trading was just the wrong timeframe (for me and almost everyone else I know). It is very hard to beat the real professionals at their own game, day-after-day. If you want to win (make money) in this game (The Markets), you've got to learn how to play a different game with odds that favor your natural aptitude and the skills that you can develop and bring to that game.

I think it is important to have terms that are not only meaningful, but also workable. So, I define a CPT as someone who can dependably generate more profit than loss in their Average Operational Timeframe (AOT). A multi-year boom-bust Business Cycle, a year, quarter, month, week or a day are all examples of an Operational Timeframe, other examples include any multiple of the prior single examples, like every three months (a quarterly earnings/dividend cycle). For example, an investor is able to generate a profit in all or almost all months over a Twelve Trailing Months (TTM) interval, such that the average is positive and sustainable because we want to become a True Market Profession, someone that can make their living in the market off their savings. However, monthly CPT status is likely to be too ambitious for most new traders. If you are just starting out, try for annual and then quarterly CPT status. A relatively new investor should be able to do this in longer timeframes, if they follow my Simple Two-by-Four Approach because it is far easier to be a (longer-term) CPT than a (shorter-term) CPT. In time, a new CPT investor can grow their trading skill and capital base. Maybe we should call a CPT a consistently Profitable Investor (CPI). But given that every investment begins and ends with a trade, I'm okay to just use the industry standard term "CPT." Let's be clear on the definition. A CPT is not someone who never experiences a loss or a drawdown, as these are going to happen from time-to-time. A CPT is able to avoid big losses, minimize the impact of unavoidable losses and drawdowns on their brokerage account, and is able to maximize the effect of all profitable market activity. A CPT is very good at putting money into their account and has a clear tendency to reliably show profitable growth over their average targeted interval of time (AOT). They clearly tend to have more money in their account at the end of their OT than they had at the beginning because they are able to reliably make money on average. Technically speaking, they have a positive Profit and Loss (P&L) Ratio because they're able to consistently book more profit than loss in their AOT. CPT status comes from a winning mindset that is supported by the knowledge, skill & the self-control needed to consistently grow the size of their brokerage account one trading timeframe after another. A CPT has mastered the ability to profitably exploit Mr. Market's natural tendency to trend up and down in seemly random cycles of premium and discount pricing for tradable securities. The classic trading mantra to earn CPT status is to Cut your losers short, and to let your winners run. And this can work, when you're able to wait for good setups — trading opportunity with favorable odds; and to have a good Stop-Loss Plan. The winners take care of themselves, it's the losers that need to be managed. But this simple approach is no easy skill to master and can easily backfire. Most traders end up losing too much money before they figure out how to do this. That's the bad news. But there's also some good news too. This is not the only way to achieve CPT status.

A trader that takes a likely profitable buying opportunity and then sells to cut their loss short after it fails to show a quick profit is very likely to be a consistently unprofitable trader unless they are one of the very few traders that have mastered the amazingly rare ability to out-trade most other pros in the market that they specialize in. And yet, this is what Wall Street encourages retail Wannabes to do, saying things like "You can trade like the pros.", and just "Let your winners run, and cut your losers short." You can hear this over-and-over again, as if repetition makes it true; but it doesn't, repetition can only make this a popular belief. So, why does Wall Street do this? Because they want you to trade as much as possible. Just like Vegas, Wall Street wants you to play their game and with as much money as you afford to bring to the table. Every time you put on a trade; Wall Street gets a chance to feed off your savings. Don't miss play this Loser's Game! It's very unlikely that you'll become one of the very few who can be a CPT using one of the popularized trading strategies. Think about, if these strategies where easy, wouldn't everybody be rich? Wouldn't you be rich by now?

Understand that most stocks need wiggle room and spend most of their time in a broader trading range along the broader market trend. If you want to be a CPT, you'll need a strategy that can exploit this (Mr. Market's) nature; and strategies with the best long-term track record employ the following properties:

If your strategy is not yielding CPT status, consider adding these properties.

CPT status is of primary importance because compounding will naturally occur over time and will therefore magnify whatever trading results we realize. A string of profits, no matter how small, will cause an equity growth curve to turn up over time, and after many years can allow us to retire in comfort; but a string of loses can simply hollow out a retirement account and force you to work in a more traditional job for the rest of your life.

CPT status is easier to realize in longer timeframes and is progressively harder to realize as timeframe decreases (e.g., almost anybody can realize CPT status over the economy's boom-bust cycle, but almost nobody can realize daily CPT status). Most skilled investors top-out at monthly CPT status and some exceptionally skilled traders can achieve weekly CPT status. Once business (boom-bust) cycle CPT status is realized, try to earn annual CPT status, which is doable after a few years of effort. And once annual CPT status is earned try to realize semi-annual, and then quarterly CPT status, which would make you an above average investor. You may not be able to achieve true monthly CPT status, but even something like 91.6% (11 out of 12) monthly CPT status is way above average and means that you are probably able to be a True Market Professional — someone who can make their living in the market.

There is a natural inverse relationship between Optimally Effective Timeframe (OET) and the ability to realize CPT. As noted above, a business cycle is the easiest timeframe to earn CPT status and daily CPTs have the potential to earn some of the very best possible rates of return. Problem is, very few will ever be able to realize weekly, much less daily CPT status. Most of new traders (investors), who can and have earned some money in the market, tend to eventually give it all back to the market trying to out-trade the market because they confuse short-term random success with real (consistent) trading skill. When first starting out most traders (investors) naturally have a limited amount of the knowledge, skill and capital, all attributes required to earn CPT status; and therefore, need time to gather the required attributes. New investors should focus on a timeframe of a year or more to achieve CPT status. But in time a trader/investor can develop the skill and save enough capital to first achieve CPT status and then to reproduce that success in smaller (quicker) timeframes. As a trader's skill and capital base increases, their OET should be able to contract, and thus increasing their effect rate of return.

One of the best ways to earn CPT status is to learn and follow my Simple Two-by-Four Approach that encourages us to think like an investor, to learn trading tactics to improve our investment results to focus the bulk of our time and capital on a few dissimilar investments that that are very likely to survive, that will pay to hold, and that are very likely to see higher prices sooner or later. Furthermore, this approach encourages us to keep our operation in-synch with the health of the broader market trend, to trade like a big professional value investor, and to develop and maintain a watch-list and an associated analytical and trading methodology. This approach is based on the properties list above.

Almost half of all S&P 500 total returns are realized from dividend payments; and that is a great reason to only focus our time and capital on investments that will pay us to hold. Once enough capital has been saved (built up), it's possible to just own a U.S. Treasury bond ladder that's always putting money in your account without taking much risk (U.S. Treasures are considered a Risk-Free Investments when held to maturity; personally, I don't believe any investment is truly risk-free, but U.S. Government debt is about as good as can be achieved). But until we're able reach that level of comfort, we need a strategy that can take advantage of normal market volatility while preserving and growing our retirement savings. To that end, may I suggest two papers. The first talks about what we need to know about the economy and markets to better exploit Mr. Market's nature. The other talks about what we need to do to get to and through retirement.

— In Summary —

The primary goal should be to realize a compound growth rate on capital savings. Earning Consistently Profitable Trader (CPT) status facilitates this compound growth. A CPT is someone who can, on average, always generate more profit than loss, and is therefore able to grow the size of their brokerage account. It's best (easiest) to start with a bigger (longer) timeframe (e.g., economy's boom-bust cycle) and then ratchet down the size of an effective operational timeframe (be a CPT in a quicker timeframe, like the quarterly earnings and dividend cycle). CPT status in quicker operational timeframes yields higher rates of compound growth.

My ultimate CPT goal is to have the ability and capital to be a True Market Professional — someone that can earn their living from their market operations.

Stan Benson