THE J-CURVE EFFECT

Jul 27, 2023

Hello traders. In today's post, we will look at such a concept as the J-curve. This curve is found in various fields and can visually represent various phenomena. However, today we will look at the J-curve as a phenomenon of trading. In the post, you will learn what a J-curve is and what its essence is.

According to Investopedia, the J-curve is a trendline that illustrates a sharp gain after an initial decline. This pattern of movement looks like a capital "J" on a chart. The J-curve is useful for displaying an event or action's impact over a certain amount of time. Frankly, it demonstrates that problems will worsen before they get better.

Let's remember how we started our journey into trading. We used to open trades with enthusiasm. The psychology of trading, oddly enough, was close to perfect. You start to get “good” at it. Sometimes the luck goes your way and you make money on a particularly good week. Things keep going. Until you blow your capital. And then another. And then another one. What seemed to be working somehow stops working. You decide to be smarter and win back by doubling the lot size each time. Or you open two trades, one up and one down. Sometimes it works, but at the end of the month your losses drained your account, and you lost substantial amount of money. The descent down the curve has begun.

Then you decide to find a "more profitable strategy" for trading and at this point you are at a drawdown. Maybe you have spent months on this, or maybe a week was enough to realize that it's not that simple. It seems that there is no way to do without studying. And if you want to make money on it steadily, and not to make money on gambling to immediately lose it again, you need to study something.

After several lost accounts, you never really got anywhere in the end. You are depressed. All that information, indicators, candlesticks, bars, patterns, books, courses, webinars, paid and free advice, trader chat rooms and YouTube channels, all this only led to the fact that you, a year later, lost even more money.

You often experience fear. You are scared to open the chart, scared to look at how the price is going, whether the prediction will come true or not. It is so scary that after opening a trade you sometimes close the browser or terminal window just to avoid looking at it. In some moments of despair absolutely you do not understand anything. All of this is some kind of mess, complete nonsense.

According to statistics, more than 60% of traders give up in the first 3 months and leave with an enormous hole in their wallet. After a year, another 30% will give up. Only 5-10% remain in the market after a year, and not all of them will get a stable profit in the following years.

This is the bottom of the J curve and at this point you are in crisis, which for most will be catastrophic. But still, something keeps you from giving up. You continue to waste time and money trying to learn. You lose a couple more accounts. It's a big hole in your pocket. But gradually the losses diminish until they stop completely. You are tired of losing money by haste, in a blind game with the market.

You learn to work with drawdowns. You know, it's because of trying to get back money that there were so many impulsive trades. So many trying to see a trend where there is no trend. You have too often gone into a trend time after time in the belief that it will continue. You constantly bet on a reversal of the price, and it never thought to turn.

You try hard to build your strategy and gradually come to a system consisting of several elements, which shows better results than other options. It still constantly gives unsuccessful trades, but you no longer want to break the monitor with your fist. Suddenly it becomes clear it's all about trader discipline and time management. It's about stability and consistency. The fact that you know how to behave not only in case of profit, but also in case of loss. You learn how to psychologically cope with failures. You realize that it is the uncontrollable desire to recover the numbers on the balance that most often led to disaster.

You have already bounced off the bottom of the J curve and are slowly climbing up. You are not a consistently profitable trader yet, but you are making much effort to become one. Sometimes there is nothing interesting on the chart for a week. Sometimes you work cautiously for a month or more, spending 90% of your time waiting for the right market conditions. The account is still standing still. Sometimes for months. You're increasing it, then you're back to the original amount. You realize things are going pretty well. You haven't lost any money at all in the past month. You at break even point on the J-curve.

At some point, you are surprised to notice that you are increasingly successful in profitable trades despite regular failures. Time is going by. The account begins to increase steadily. The first month was a small profit. Second. Third. You are at the highest point of the J-curve. Exponential growth.

So, what brings traders success? Trading is a business, and like any business or startup, things don't go smoothly at the beginning. That's why you have to survive before you thrive. The number-one key element is effort—trying to improve every day. Backtesting the strategy to make it suitable for you. Journaling your trades and emotions and all of these, of course, takes time. The more time you put into it, the faster you will get to the break-even point. You need to invest money in your trading education. Maybe it's a course or book. Or backtesting tool that will accelerate learning curve and improve your trading skills. The combination of these three elements creates success (TIME + EFFORT + MONEY = SUCCESS). If you take one of these out of the equation, the learning process may slow down. Some traders become profitable after 5–10 years, some after 12–18 months. All depend on balancing the equation.