10 Reasons Trading is So Difficult

Here is why trading is so difficult:

  1. You can back test a system as much as you want but when you start trading it the profitability will be determined by the market conditions not past price history. What looks great on paper can lose on a lot of consecutive trades right at the start.
  2. Your stop can be hit and then the market go in the direction you were positioned for.
  3. Sometimes that pullback that you are waiting for to buy never comes until the trend is over.
  4. Sometimes every momentum signal you buy will be a loser for a long time.
  5. Many times the market whipsaws you in a position for absolutely no reason you can understand.
  6. Sometimes your biggest position sizes are losing trades and your smallest position sizes are the winners.
  7. There is no ‘market’ you are trading against a herd of people all making decisions for many different reasons, and they are not predictable.
  8. You can feel foolish under performing buy and holders during straight up bull markets when you’re trading in and out.
  9. Some trading lessons can’t be learned they have to be experienced with real money.
  10. Money is made and kept based on the math of probabilities, risk, and reward not because a trader is the smartest but because they are the most flexible and adaptable.

10 Mental Errors Traders Make

The primary thing that trips up the vast majority of traders and investors is not the math, the markets, or a trend. What causes the 90% to end up unprofitable in the long run is mental errors. Errors caused by fear, ego, greed, and a lack of discipline to create a plan or to follow it if they do.

Here are the 10 primary mental errors traders and investors make.

  1. They hold on to preconceived beliefs about the direction of the market with no planned signal that will show them they are wrong. This is an ego error when we think we’re smarter than the market.
  2. Taking a huge position size that will cause a huge loss if wrong or a huge win if right. This is greed that only sees the upside and not the downside.
  3. Buying a position late in a move when the risk/reward is not favorable is due to the fear of missing out on a profit.
  4. Trading with no plan is due to laziness and possibly arrogance.
  5. Not taking a stop loss when it is triggered is usually due to the fear of locking in a loss.
  6. Abandoning a plan is due to fear of a draw down or a lack of discipline.
  7. The inability to manage emotions as the trader or investor sees money enter and leave their account is usually due to stress so profound that they can not trade.
  8. Being wrong and staying wrong about a trade is due to stubbornness and denial.
  9. Entering a trade without a good safety margin with a stop loss or a great entry is simply gambling. Trading without a set up is the error of a gambling impulse going in with the odds against them in hopes of easy money.
  10. Asking others for opinions about trades shows our own lack of discipline to have a plan, a system, and to have done our own homework.

William J. O’Neil’s 10 Trading Principles:

William J. O'Neil
William J. O’Neil


William O’Neil is likely one of  the greatest stock traders of our time. O’Neil made a large amount of money while he was only in his twenties, enough to buy a seat on the New York Stock Exchange. Today, he runs a successful investment advisory company to big money firms, and is also the creator of the CAN SLIM growth investment strategy, which the American Association of Individual Investors named  the top performing investment strategy from 1998 to 2009.This non-profit organization tracked more than 50 different investing methods, over a 12 year time period. CANSLIM showed a total gain of 2,763% over the 12 years. The CAN SLIM method is explained in O’Neil’s book “How to Make Money in Stocks”.

Mr. O’Neil founded “Investor’s Business Daily” to compete directly with “The Wall Street Journal”, and he also discovered of the “cup with handle” chart pattern.

Those closest to O’Neil that have seen his private trading returns say that they are greater than Warren Buffett’s or George Soros over the same time period. Here are some of the principles that lead to his results, and why he is considered a trading legend.

#1 He sells a stock he is holding after it has gone down 7% from his purchase price.

“I make it a rule to never lose more than 7 percent on any stock I buy. If a stock drops 7 percent below my purchase price, I will automatically sell it at the market – no second-guessing, no hesitation”

#2 One of the major keys to his profitable trading was only having small losses when he was wrong. 

“The whole secret to winning in the stock market is to lose the least amount possible when you’re not right.”

#3 William O’Neil studied historical chart patterns relentlessly and read thousands of trading books.

“90% of the people in the stock market, professionals and amateurs alike, simply haven’t done enough homework.”

#4 He invested in an industries leading stocks not its laggards and dogs.

“It seldom pays to invest in laggard stocks, even if they look tantalizingly cheap. Look for, and confine your purchases to, market leaders.”

#5 O’Neil ‘s investing style lead to big winners and small losing trades.

“Investors cash in small, easy-to-take profits and hold their losers. This tactic is exactly the opposite of correct investment procedure. Investors will sell a stock with profit before they will sell one with a loss.”

#6 He did not waste his time and money playing the short side in bull markets.

“Cardinal Rule #1 is to sell short only during what you believe is a developing bear market, not a bull market.”

#7 Fundamentals told O’Neil what to buy and the chart told him when to buy.

“The number one market leader is not the largest company or the one with the most recognized brand name; it’s the one with the best quarterly and annual earnings growth, return on equity, profit margins, sales growth, and price action.”

#8 O’Neil knew exactly what he was doing in the markets. He had a trading plan, trading principles, and rules.

“Some investors have trouble making decisions to buy or sell. In other words, they vacillate and can’t make up their minds. They are unsure because they really don’t know what they are doing. They do not have a plan, a set of principles, or rules to guide them and, therefore, are uncertain of what they should be doing.”

#9 O’Neil traded price action not his own opinions or of anyone else.

“Since the market tends to go in the opposite direction of what the majority of people think, I would say 95% of all these people you hear on TV shows are giving you their personal opinion. And personal opinions are almost always worthless … facts and markets are far more reliable.”

#10 He watched a stocks volume as part of his trading plan.

“The best way to measure a stock’s supply and demand is by watching its daily trading volume. When a stock pulls back in price, you want to see volume dry up, indicating no significant selling pressure. When it rallies up in price, you want to see volume rise, which usually represents institutional buying.”




‘The Psychology of Trading’ Book Review

The Psychology of Trading: Tools and Techniques for Minding the Markets

Author Brett Steenbarger has done a great job with this book. He covers what I personally believe is the most important element in trading: psychology.

New traders will probably not last through their first year in the markets without blowing up their accounts by taking losses too personally. Many times draw downs cause traders to start gambling when they become desperate to recover their losses. Many times increasing position size when they should be decreasing it is an ego-driven desperation to get back their losses. Other similar bad mental behaviors creep into our trading careers as dysfunctions in our personal lives cloud our minds from being able to make the right decisions in following our systems and established trading principles.

What this book shows is how to take the proper perspective and observe our greed and fear, enabling us to see them for what they are instead of getting caught up in these powerful emotions that lead to terrible consequences in our accounts and lives.

This book is a very good book on both psychology and trading. It is packed with lessons from the authors patients and his own experiences. What the book shows is that we are the most important element in our trading. We must have the right mind set in trading, and while developing as a trader we need to keep a log of the emotions we feel on our losses and wins to better understand ourselves and why we make emotional charged decisions that we shouldn’t while trading.

We must continually ask ourselves:

Why did I make that bad trade?
What exactly was I telling myself when I entered it?

This book is about being mindful of our thoughts and emotions while trading. About not being lead blindly by them away from our predetermined trading rules and plans.

Is our low self esteem getting in the way of our trading or is our ego causing us stress and losses? Out of the many trading books I have read I would put this in the top ten with no hesitation. The psychology of the trader is the most important element of trading and often the most neglected in other books. Without the right mind set you can not trade the markets successfully for any length of time. The pressures, stresses, and emotional highs and lows are to much for most traders to handle over the long term. This book is a must read if you are serious about being a profitable trader over the long term.

Discretionary Versus Systematic Trading

The difference between traders that rely on their instincts and chart reading abilities and those who are pure system traders.

Discretionary Traders…

  • …trade information flow.
  • …are trying to anticipate what the market will do.
  • …are subjective; they read their own opinions and past experiences into the current market action.
  • …trade what they want and have loose rules to govern their trading.
  • …are usually very emotional in their trading and taking their losses personally because their opinion was wrong and their ego is hurt.
  • …use many different indicators to trade at different times. Sometimes it may be macro economic indicators, chart patterns, or even macroeconomic news. They are very “flavor of the month” in that regards.
  • … generally have a very small watch list of stocks and markets to trade based mostly off the time on their expertise of the markets they trade.

Systematic Traders…

  • …trade price flow.
  • …are participating in what the market is doing.
  • …are objective. They have no opinion about the market and are following what the market is actually doing, i.e. following that trend.
  • …have few but very strict and defined rules to govern their entries and exits, risk management, and position size.
  • …are unemotional because when they lose it is simply that the market was not conducive to their system. They know that they will win over the long term.
  • …always use the exact same technical indicators for their entries and exits. They never change them.
  • …trade many markets and are trading their technical system based on prices and trends so they do not need to be an expert on the fundamentals.

While discretionary traders are busy trying to digest what fundamental news and information mean, systematic traders are taking the signals they are getting from actual price movement in the market. Systematic traders are not thinking and predicting what the market is going to do, they are reacting to what the majority is doing based on their predetermined system’s entry signals.

For the average trader being a 100% Mechanical System Trader usually maximizes the chance of success in the markets, especially if you are using a historically proven profitable system. If you are removing the emotions and ego out of your trading and are controlling your risk of ruin with proper trade size and stop losses, then you have probability on your side of joining the consistently profitable traders in the market.

Now what sort of trader do you want to be?