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Stock Market

How to Make Money in the Stock Market


How do you make money in the stock market? It seems like such a simple question, yet finding reliable answers can be challenging.

The good news is that we have actionable answers based on bonafide statistical research. We did the heavy lifting and boiled it down to a few simple concepts that can help you make money in the stock market. One of the ideas here is good enough that you could potentially even build a trading career around it.

Although you might have a friend who made a killing by selling GameStop stock and always hypes up his latest stock picks, we’re not going to tell you how to do what he’s doing. That’s because we’re not focusing on speculation, hype, or luck in this article. We’ll concentrate on tried-and-true ways to make money in the stock market that have repeatedly stood up to the test of time.

Why should you trust our perspective? Our staff here at CashBlog has years of stock market research experience. I’m not just talking about stock market trading experience here. I’m talking about statistical research on the price tendencies of stocks.

Please note that we are not financial advisors at CashBlog. This article is strictly educational.

To Make Money in the Stock Market, You Need a Trading Account

Before we get to the meat of this article, let’s get past the boring stuff: first, you need a way to buy and sell stocks in the stock market (see our guide to the best stock trading platforms). You also need access to cash! But if you have those things set, you can take action on any of the concepts below.

How does Warren Buffet Make Money in the Stock Market?

The first way to make money in the stock market is to follow Warren Buffett’s advice. He’s one of the most famous stock market investors of all time.

Warren says you should buy and hold “the market.” And when we say hold, we mean to hold it for as long as you possibly can. Years. Decades. If you’re interested in actively trading in the stock market, then this advice may not be for you, and you can skip to the next concept below.

What does it mean to buy and hold the market? It means owning a basket of stocks that adequately represents the entire market.

Rather than hand-picking stocks to accomplish this, you can buy an ETF for a market index instead.  

The S&P 500 is an example of a market index. It consists of 500 of the biggest companies in the stock market.  

An ETF stands for exchange-traded fund. It is a fund that will hold positions across an entire sector or index, such as the S&P 500.  

Examples of ETFs that follow the S&P 500 are SPY and VOO. So if you want to buy and hold the market, you can go into your trading platform and type in the ticker “SPY” or “VOO” and buy shares of it. It’s just like buying shares of any other stock.

Warren Buffett loves this strategy because it performs so well and is simple. Over the last 90 years, this strategy would have resulted in a 9.8% annual return.

That’s pretty awesome. Suppose you bought SPY and didn’t touch it for 30 years, and it averaged a 9.8% annual return. In that case, you’d have more than ten times what you originally started with, even after accounting for very roughly-estimated tax (but remember, we’re not tax advisors here at CashBlog).  

The key to the whole thing is holding for the long term and not trying to pick individual stocks. Cut out any potential over-analysis or emotional decision-making and simply own the market for the long haul. If you take that approach, you’re following the advice of perhaps the most famous value investor. It could be the most intelligent decision you ever make with your finances, and it’s a great way to make money in the stock market.

Make Money from Buying Stock Market Pullbacks

If you want to be more active in the stock market and trade more regularly than once every 30 years, then buying pullbacks could be an effective strategy.

We know of many people who built professional trading careers based on this simple approach, and it does not require any advanced intuition or rocket science.

What are pullbacks? Well, the picture here helps a lot with depicting it. A pullback occurs when the price of a stock has been trending upward and then “pulls back” (or, in other words, goes down a little).

If you look at the red arrow in this picture, you can see that the overall direction is up, but there are two times when the arrow zags downward along the way. If you imagine the red arrow as the stock’s price over time, those downward zags are considered pullbacks.

The idea is to buy the stock during a pullback. Why do we think this is a good way to make money in the stock market?

It’s from all the statistical research we’ve done on pullbacks.

In our research, we looked at pullbacks where the price had driven forcefully upward and then fallen back to its “average” price from the previous couple of weeks. We looked at every pullback for 1,000 of the most significant stocks over the last 20 years.

Our research showed us that for those pullbacks, more than 55% of the time, the prices went upward after the pullback occurred. That’s a bonafide trading edge, folks.

Now in terms of how much income you can generate based on that sort of win rate, that all depends on how you set up your trades, which is the next topic you’ll need to understand to make money in the stock market.

Make Money by Setting Up a Stock Market Trading Plan

Now, even if you’re ready to give it a shot and try trading some pullbacks, you still need to devise a game plan for how you manage your trades. How many shares are you going to buy? How long are you going to hold the position? How often are you going to trade?

If you want an expert to show you how to make these decisions, you could try out the Mindful Trader service Eric Ferguson runs. He’s an example of a guy who has made a career out of trading pullbacks (among other things), and he has a stock-picking service you can follow where he takes all the guesswork out of trading decisions. Here’s an example of how his stock picks look:

 

 

But if you’re more inclined to do the work on your own to make money in the stock market, you’ll need to firm up a trading plan for how to trade these pullbacks. The following is a trading plan that we like:

  • We set a profit target and stop loss, each 2 ATRs away from the entry price. ATR stands for Average True Range. It’s a stock market metric that is widely used and is likely visible in your stock trading platform, but if not, you can Google the ATR for any given stock to find out what its ATR is at that moment.
  • We risk 2% of our account balance on each trade. By this, we mean that if the price hits our stop loss for that one trade, our account balance decreases by 2%.
  • We take two pullback trades per week. Some weeks don’t have any pullback trades, and some weeks have a boatload. We aim to take two trades per week on average.
  • We stay in trades for a maximum of one week.

Combining this trading plan with our pullbacks test shows an average return of 24.5% per year. That’s a substantial return for two trades per week. And you can dial things up or down based on how many trades you take on and the amount of your account balance you put at risk on each trade.

If you dialed up the trading volume and made pullback trades daily, you could potentially build a career out of trading pullbacks. That’s how strongly we feel about this trading strategy.

A word of caution: even though buying pullbacks may have been a great approach to making money in the stock market historically, there are periods when pullbacks don’t work so well. It is hard to predict when these periods will come up.

We choose to keep trading them through all market conditions because, over the long term, they have a history of paying off, and we’d prefer not to play guessing games about the market’s direction.

We can tell you from experience that it can be hard actively trade in the stock market during periods of consecutive losses.  

Get Educated by a Pro to Make Money in the Stock Market

So far, we’ve given you two well-founded ways to make money in the stock market: buying SPY for the long term and buying pullbacks. These are effective strategies to consider, and we like using those two approaches exclusively. But perhaps you’re looking for something more.

If you want to explore the idea of making a career out of trading in the stock market, you might be looking for more education than one article can provide.

If that’s the case, then picking a mentor could be a smart next step. The problem is that so many people claim to be “pros,” and it’s hard to tell who’s good and who’s full of hot air.

We have experience with the stock market education course at Investors Underground. The guy running it has been a profitable trader for many years. He personifies the active stock market trader. He has five monitors on his desk, all feeding him stock market charts.

Investor Underground has a comprehensive training course, but beyond that, they also have this thriving community of traders who all help each other. First, you go through the educational material and learn the trading setups and techniques. Then you join the chat rooms and see all the ideas about which stock tickers have good trading opportunities.

So Investors Underground is not just a stock market trading educational service. It’s also a source of trading ideas. You’re learning trading techniques and also getting leads from some trading pros.

It’s a significant investment to go this route, both financially and in terms of your time. But if your dream is to make money in the stock market daily, Investors Underground may help make your dreams come true.

Conclusion

If you want to know how to make money in the stock market, you must first decide how active you want to be.

If you want to make money but want as little work as possible, consider following Warren Buffett’s advice on buying and holding the market. It’s straightforward and could offer a great return over time.

If you want to be more engaged in the stock market and want the potential for a higher return, buying pullbacks is a reliable approach that is both simple and repeatable.

If you want to become a full-time trader, you can either trade pullbacks more frequently or get educated by a pro to get the in-depth training needed to become a professional trader.

You now have the keys to making money in the stock market.

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James Rochester

James Rochester has decades of stock market experience. He's run his own stock market intelligence firm and is an active trader of stocks, options, and futures.

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The content on Cashblog.com is for informational and educational purposes only. It is not financial advice and we are not certified financial advisors. Cashblog.com strives to keep its information accurate and up to date, but it may differ from actual numbers. We may have financial relationships with companies listed on our site. We may receive compensation for the placement of sponsored products or services. We work hard to write authentic and accurate articles.