Short lessons on momentum trading, every day.

“You Only Matched the S&P 500. Why Even Bother Trading?”

A lot of traders are chasing superperformance.

But there's something about trading performance that I think gets overlooked far too often.

When someone spends an entire year actively trading and finishes with returns comparable to the S&P 500, you'll inevitably hear:

"Could've just bought SPY and saved yourself the trouble."

Maybe, but have you looked at how much risk that trader took to achieve those returns?

Consider a hypothetical example.

The S&P 500 finishes the year up 11%, but experiences a 20% maximum drawdown along the way.

Another trader finishes up the same 11%, but their maximum portfolio drawdown was only 5%.

Same return. One-quarter of the drawdown. Completely different return-to-drawdown profile.

Peter Brandt discusses this relationship extensively in Diary of a Professional Commodity Trader. Van K. Tharp emphasizes evaluating returns relative to maximum peak-to-trough drawdowns. And in Jack Schwager's Market Wizards, Marty Schwartz makes it clear how much importance he places on controlling the downside.

These traders understood that performance isn't just about how much money you make. It's also about the risk involved in making it.

Now, does one year of lower drawdowns automatically make someone a better trader? Of course not.

But maybe that trader isn't trying to achieve 100% annual returns.

Maybe their objective is to preserve capital, minimize drawdowns, generate reasonable returns, and enjoy something they're genuinely passionate about.

And there's absolutely nothing wrong with that.

I'll continue pursuing superperformance, but I also recognize that not every trader has the same objectives.

Before dismissing someone's trading because they merely matched the market, consider what they accomplished relative to the risk they took.

How much you made is only half the story. How much you had to risk is the other half.

William O’Neil Said This Decades Ago.

One of my favorite distinctions from William O’Neil in Market Wizards:

“So you treat a fund very differently from an individual stock account?” “Very, very differently. With an individual stock, you absolutely have to have a stop-loss point, because you never know how far down the stock is going.” - William O’Neil, Market Wizards

This is an important difference.

An individual stock and a diversified fund should not always be managed the same way.

An individual company can permanently deteriorate.

Earnings can collapse. Management can fail. A competitive advantage can disappear. In extreme cases, the stock can eventually become nearly worthless.

That is why O’Neil was so aggressive about cutting losses in individual stocks.

But a broadly diversified fund is different.

O’Neil went on to say:

“When you buy a fund, you want to be in it for 15 years or more. That is how you will make the really big money. But in order to do that, you need the courage to sit through three, four, or five bear markets. The typical diversified growth stock fund will go up 75 to 100 percent in a bull market, but it will decline by only 20 to 30 percent in a bear market.”

- William O’Neil, Market Wizards

That gets to the heart of his argument.

A diversified fund owns many companies across the economy. Individual companies can fail while the fund survives, changes its holdings, and participates when the broader market eventually recovers.

And I think this principle translates directly to many ETFs today.

A broad-market ETF tracking something like the Nasdaq-100 (QQQ), S&P 500 (SPY) or total U.S. stock market (VTI) is much closer to the diversified mutual funds O’Neil was describing than it is to owning one individual company.

But….

Not every ETF should be treated this way.

Leveraged ETFs, inverse ETFs, single-stock ETFs, highly concentrated sector ETFs, and narrow thematic ETFs can carry very different risks.

And if you are trading an ETF tactically rather than holding it as a long-term diversified investment, a predefined stop should be used.

Don’t treat a broken individual stock like a diversified index fund.

And don’t treat a normal bear-market drawdown in a broadly diversified long-term fund like one company whose thesis has completely failed.

Ironically, O’Neil pointed out that many investors do the exact opposite.

They hold individual-stock losers hoping they come back, then panic and sell diversified funds during bear markets.

Individual stocks require protection from permanent loss.

Broad diversified funds require the patience to survive normal market cycles.

Two different vehicles.

Two different jobs.

Two different timeframes.

Two different approaches to risk.

Before You Chase the Next Breakout, Step Back

Like I say every week, before you dive into individual stock screening and selection, step back and understand the market environment and the big picture.

The weekend is the perfect time to do this while the market is closed.

The Nasdaq-100 held the 10-week moving average this week, breadth improved, net new highs stayed positive, and volatility cooled.

But the market has not fully repaired last week’s warning shot. QQQ and SPY still need to reclaim the 10-day and 20-day moving averages, distribution days remain elevated, and short-term leadership is rotating beneath the surface.

Stepping back and reviewing the big picture can give you clarity before stock screening and help you ask the right questions:

• Which stocks held up best during the pullback?

• Which names are already moving to new highs while the major indexes are still repairing?

• Which groups are attracting new demand?

• Which stocks are continuing to lead?

That is where the next watchlist starts.

Read the Big Picture Market Pulse here:

https://tradingmomentum.substack.com/p/the-nasdaq-held-the-10-week-now-comes

Calling Yourself an Investor Does Not Remove the Risk

A lot of people believe investing is automatically safer than trading.

That is not necessarily true.

What often happens is someone fails at trading, pushes out their timeframe, stops using stops, and starts calling themselves an investor.

Now instead of taking a small loss, they are “holding for the long term.”

Instead of admitting the trade failed, they convince themselves they own a great company.

Instead of following a process, they hide behind a label.

There is nothing wrong with passive investing.

If someone does not want to trade, I completely understand buying broad market ETFs like SPY or QQQ and passively investing into the major indexes over time.

That is very different from buying individual stocks with no rules.

Individual stocks are not the same as owning the market.

• A single company can break down.

• A former leader can lose institutional support.

• A growth story can slow.

• A stock can go sideways for years.

• A stock can decline 50%, 70%, or 90% and never come back.

So if you are going to buy individual stocks, even on a longer timeframe, you still need a system.

• You need to know when you are wrong.

• You need rules for cutting losses.

• You need rules for letting winners run.

You need a process for separating normal volatility from real deterioration.

That is why so many “investors” underperform the market.

They are not really investing with a disciplined strategy.

They are just holding stocks and hoping time fixes bad decisions.

When you read Market Wizards, you see traders and investors with different styles, different timeframes, and different methods.

But almost none of them are simply buying individual stocks, holding them for years, ignoring losses, and operating with no exit plan.

• They have rules.

• They manage risk.

• They protect capital.

They understand that being on a longer timeframe does not eliminate the need for discipline.

Calling yourself an investor does not make individual stock risk disappear.

If you do not have a plan to cut losses and let winners run, you do not have a safer strategy.

You just have a slower-moving mistake.

The 4 Rules That Separate Average Investors From Superperformers

Most people are taught the wrong things about the stock market.

Turn on financial TV and you will hear the same advice repeated over and over:

You cannot time the market. Diversify widely. Buy and hold. Trade less.

But traders who achieve true superperformance do something very different.

Mark Minervini laid out four key principles that helped him turn a small account into millions and win the U.S. Investing Championship.

Here they are.

1. Yes, You Can Time the Market

Most experts say market timing is impossible.

Yet every great trader times the market.

Not by predicting the future.

By waiting for specific conditions and precise setups.

When the odds are in your favor, you act.

When they are not, you stay out.

Timing is everything because asymmetric opportunities require precision.

2. Overdiversification Kills Performance

Owning too many stocks dilutes your results.

If you want broad diversification, you might as well just buy an index ETF like SPY or QQQ.

Great traders focus on a small number of high-conviction opportunities.

Concentration is what allows a big winner to actually move your portfolio.

3. Turnover Is an Advantage

Wall Street funds often hold positions for long periods.

Not because it is optimal.

Because they have billions to manage.

Individual traders have a massive advantage.

You can enter quickly. You can exit quickly. You can move capital to the best opportunities.

Flexibility is one of your greatest edges.

4. Always Demand Asymmetric Risk vs Reward

Superperformance comes from repeatedly taking trades where the potential reward greatly outweighs the risk.

Small losses are part of the process.

The goal is simple.

Lose small. Win big.

A trading system built around low risk entries and large upside potential allows a few big winners to drive your results.

Most investors try to be right most of the time.

Great traders focus on making sure their winners are much bigger than their losers.

That is how superperformance is built.

Winning in Trading Demands Everything and Promises Nothing

Most people fail at trading because they start by treating it like a get rich quick game. When they realize it isn’t, they move on. This happens every cycle. A new group comes in, then quietly leaves.

Because of that, the hard truth is that most people would be better off consistently putting money each month into a simple ETF like SPY or QQQ and letting time do the work.

For the few who stay, the path looks very different.

They get their ass kicked.

They hit the books.

They get their ass kicked again.

They study more, test, execute, and eventually find a method with a real edge.

Just as important, they learn when and how to use that edge. That’s what gives them a chance.

Winning long term at trading requires far more than most people realize. It’s total commitment with no guarantees. It reminds me of a video I showed my boys who compete in sports:

“Winning requires all of you, and more, but it promises you nothing.”

-Lewis Caralla

When emotions run high, zoom out

I’m a short-term trader.

I run a day trading account. I also run a swing and position trading account built around O’Neil and CANSLIM and I also have an account that does nothing fancy and consistently invests into SPY and QQQ.

You would think someone like me would be the most emotionally affected by short-term market moves.

I’m not.

A 2% down day like today is no big deal. It is not the end of the world, no matter how financial media or influencers try to frame it.

When in doubt, zoom out.

What always surprises me is how emotional people get over pullbacks, corrections, and even full bear markets. Most of these people are not short-term traders. They claim to be long-term investors with long time horizons, yet they panic at exactly the moments that long-term investors should expect.

Look at the last 20 years.

• Tariff scares.

• COVID.

• The 2022 bear market.

• 2018.

• 2015.

• 2011.

• The Great Financial Crisis.

Even with all of that, the Nasdaq-100 is up over 1400% in the last two decades.

That perspective changes everything.

If normal volatility makes you emotional, that is feedback. It usually means one of two things. You are either gambling, struggle emotionally, or you do not truly understand markets or risk management.

Long-term investing is boring. It requires patience, discipline, and the ability to ignore noise.

The market does not reward emotional reactions. It rewards time, consistency, and perspective.

Zoom out.

Most People Are On the Slow Path and Don’t Know It

Fun fact: About 70 percent of people click their 401k default options, and another 30 percent try to manage things themselves. But here is the shocking part. Ninety five percent of professional fund managers cannot beat SPY or QQQ long term, and 70 to 90 percent of individual brokerage accounts fail to make money at all.

If you simply avoid the default and choose QQQ for long term growth, and move to SPY as you get closer to retirement, you instantly put yourself in the top tier of all retirement accounts. No trading. No stock picking. No timing. Just choosing a better index.

I just published a full breakdown showing why even William O’Neil told most people to keep it simple, along with two charts that make this reality impossible to ignore. One shows QQQ vs a typical 401k fund since 2006. The other shows what 1,000 dollars per month would have grown into with each one. The difference is life changing.

Read the full post here: https://tradingmomentum.substack.com/p/even-william-oneil-knew-most-people