Ray Dalio

Ever wonder how a billionaire hedge fund manager defines progress? I have. All the time. It’s what I think about at night when sleep eludes me and sheep counting gets boring. Fortunately, I stumbled upon the answer when listening to an interview of Ray Dalio who is the founder of a Bridgewater Associates, a hedge fund with some $150 billion under management.

You know, pocket change.

Dalio cleverly articulated his definition of progress as a formula: pain + reflection = progress. Today I wish to deconstruct the equation with the objective of identifying just how you and I can grow as traders. Remember, there’s a pot of gold at the end of the rainbow but only those who seek improvement ever attain it.


Nobody likes pain. And, unfortunately, the stock market likes to dole it out massive quantities from time to time. And when is the pain the most potent? It’s certainly not when you’re swimming in profits. I’ve never met a trader crying while counting his dough, unless they were tears of joy. It’s fair to say that on Wall Street pain is synonymous with loss. Simply put, losing trades deliver pain while winning trades grant pleasure.

And since losing trades are inevitable, for all but the most robotic of us, pain will arrive unbidden every year.

But while the presence of pain is mostly out of our control, its potency isn’t. We dictate just how much potential pain awaits at the end of every bet through our sizing. Only a dum-dum gives a single trade the power to destroy his entire investment account. Consider this little gem reason #274 for why sound risk protocols are a must.

In sum, pain and loss are synonyms.


The second part of the equation is what makes all the difference. It’s the battery that makes the whole machine run, as it were. Everyone experiences pain, but few spend time and resources for reflection before moving onto their next adventure.

I can think of numerous questions that should be a part of the reflection phase. Chief among them is, “Was my loss because of a mistake I made or simply because the market didn’t cooperate?” Remember, not all losses (pain) can be blamed on you being an idiot. Sometimes you follow your trading plan or system perfectly, never deviating from the rules for a second, and still lose. That’s part of the game and what should be considered a good loss, or an acceptable loss. Your job in trading is to get to the point where all your losses are “good losses.”

The principal purposes of the reflection phase are to identify bad losses, those that should be considered unacceptable. By definition, a bad loss is one that arrived due to your misbehavior. Think of it as user error. The eradication of these types of trades will undoubtedly lead to progress.

So is that it? Is the reflection phase intended solely to identify bad trades?

No. A second purpose is to identify areas of improvement for your trading plan or systems. This isn’t to suggest that endless tinkering is necessary to create a perfect system. Furthermore, I don’t even know what the definition of a perfect system is. The reason we need continual reflection on our systems is that market conditions change. Wall Street is a Darwinian environment where those who refuse to adapt will suffer sub-par returns at best and end up in the graveyard at worst.

To properly reflect, you have to have your trade stats available. And that requires some type of journal. Fortunately, the Tackle Trading Journal is already programmed with the essentials. But having a record isn’t sufficient. You need to set aside time for a proper perusal of the data and identification of key takeaways. This is what I do in my monthly retrospectives, and it has improved my trading dramatically. If you’re not sure how to structure your reflection sessions, then use these as a starter guide.


When it comes to trading, I suspect we’d all define progress as making more money. The hope, then, is that by reflecting on our pain and modifying our behavior we can generate better returns. But if put on our thinking caps we can come up with a second definition of progress. How about smoothing out our equity curve? Essentially this means we’re reducing the amount of fluctuation in our account value over time.

Elimination of gut-wrenching drawdowns will reduce your emotions and arguably increase your longevity as a trader. It’s not just the destination that matters (making more money), it’s the path you have to take to get their (your equity curve).

Equity Curve