The Path to Profitable Trading is the source of this image.


The path to profitability

  1. Commit to doing the work required to be a successful trader.
  2. Create a trading system that captures trends in your time frame. A trader has to be on the right side of the trend in their time frame. The path of least resistance is where you will find the best odds of profitability.
  3. Trade with a plan so your decisions are made before the markets open, and your emotions put you at risk.
  4. Trade a position size that enables you to stay disciplined with entries, exits, and stop losses. Trading too big will lead to errors in judgement.
  5. Your entries should put the probabilities of profits on your side. Backtesting, pattern recognition, and chart studies will give you an edge over those that trade based on opinions.
  6. A trade must have a favorable risk/reward ratio. Your stop loss should be close, while your profit target is farther away.
  7. A trader can only be profitable with either a high winning percentage or big wins and small losses. Combining the two is the path to profitable trading.
  8. A trader has to limit their maximum account drawdown to a level that eliminates their risk of mental ruin. A successful trader stays away from their financial and mental breaking point, and never quits.
  9. Your system should ensure that you will have the right position when huge moves take place.
  10. A trader’s methodology, plan, and system must match the trader’s personality, risk tolerance, and belief system.

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.”




12 Signs You’re in a Bad Trade

  1. Your entry is based on your opinion not a valid signal.
  2. Your bet is that a trend will change with no reason behind the bet.
  3. You are entering out of greed after a big move.
  4. If you are wrong about the trade you will suffer a huge loss.
  5. You enter a trade with no stop loss.
  6. You enter a trade with no exit strategy to bank any profits.
  7. You enter based on someone’s opinion.
  8. You enter a trade because you are bored.
  9. You are trading a market you have done zero back testing or chart studies on.
  10. You are trading futures or option contracts you do not understand.
  11. You are trading with confidence even though you have zero confidence.
  12. You have no idea what the hell you are doing.

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?