Here’s Why Trading Stocks Is So Hard

The last few days and weeks are a great reminder of how difficult it is to successfully trade stocks. There’s a reason why there aren’t many traders that are household names. Even people in the business would likely find it difficult to rattle off ten legendary traders. One of those legends, Paul Tudor Jones had this to say about trading:

“My metric for everything I look at is the 200-day moving average of closing prices. I’ve seen too many things go to zero, stocks and commodities.  The whole trick in investing is: “How do I keep from losing everything?”  If you use the 200-day moving average rule, then you get out.  You play defense, and you get out.”

Let’s take PTJ’s rules one step further. While being long above the two-hundred day moving average is a good rule of thumb, being long above the two-hundred day moving average while the line is trending higher is even better. The problem is, the *200-day moving average is **trending higher just 40% of the time. Similarly, the 200-day moving average is trending lower 18% of the time. That leaves the market without a trend, like we currently are, 42% of the time.

“The trend is your friend” is one of the most valid axioms in finance. Let’s turn to the data for confirmation. Although stocks have been in a downtrend just 18% of the time, 42% of all losses have occurred in that small window. Look at the average monthly performance when stocks are in an uptrend, downtrend and without a trend.

There are always opportunities for traders to make money, but as you can see, when markets are trendless, it becomes much more challenging. Market direction is inconclusive for such a large amount of time, which is why successfully trading stocks is such a difficult game.

*I used the 10-month moving average, roughly equivalent to the 200-day
** When the moving average is increasing by >1% it’s an uptrend, a downtrend is when it is decreasing by <-1%.
***I used the Dow Jones Industrial Average, price return only