How do you make money in the stock market? It seems like such a simple question, and yet finding reliable answers can be tough.
The good news is that we have actionable answers here that are based on bonafide statistical research. We did the heavy lifting and boiled it down to a few simple concepts that truly can help you make money in 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 goes around hyping 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’re going to focus 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? It’s because across our staff here at CashBlog.com, there are years of stock market research experience. I’m not just talking about stock market trading experience here. I’m talking about statistical research of the price tendencies of stocks.
Before we get to the meat of this article, let’s get past the boring stuff: first things 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, then you can take action on any of the concepts below.
Please note that we are not financial advisors at CashBlog.com. This article is strictly educational.
What Would Warren Buffett Tell You to Do?
The first way we’re giving you for how 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 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 is “the market”? Well if you take the S&P 500 (which is a list of 500 of the biggest companies in the stock market) and you buy a sliver of each of those companies, that’s like owning the market because you own a little piece of everything.
How do you get access to these S&P 500 company slivers? There are tickers in the stock market for that exact purpose. VOO and SPY are ones that fit the bill. You type either of those tickers into your trading platform just like any other stock and buy it in order to follow his suggestion.
Warren Buffett loves this strategy because it performs so well and is so simple. Over the last 90 years, this strategy would have resulted in an 9.8% annual return.
That’s pretty awesome. If you bought SPY and didn’t touch it for 30 years and it averaged a 9.8% annual return, then you’d have more than 10 times what you originally started with, even after accounting for very roughly-estimated tax (but keep in mind we’re not tax advisors here at CashBlog.com!). And if you’re buying more SPY every month or every year, things could get pretty lucrative. Sounds like a good retirement plan!
The key to the whole thing is holding for the long term and not trying to pick individual stocks. Basically cut out any potential mind games or emotional decision-making, and simply own the market for the long haul. If you do take that one simple approach, then you’re following the advice of perhaps the most famous value investor of all time. It could be the smartest decision you ever make with your finances, and it’s a great way to make money in the stock market.
If you’re looking to be more active in the stock market and want to trade more regularly than just once every 30 years like Warren Buffett suggests, then buying pullbacks is a great strategy to consider.
In fact, we know of many people who built professional trading careers based on this one simple approach, and it truly 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 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 of the arrow is up, but there are two times where the arrow zags downward along the way. If you imagine the red arrow as being the price of the stock over time, then 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 prior couple weeks. We looked at every pullback that occurred for 1,000 of the biggest stocks over the last 20 years.
What our research showed us is 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! (And as a side note, we also found a way to identify turbocharged pullbacks.)
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 in order to make money in the stock market.
Set Up a Trading Plan
Now even if you’re ready to give it a shot and try trading some pullbacks, you still need to come up with a game plan for how you’re going to 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 service at Mindful Trader, which is run by Eric Ferguson. He’s an example of a guy who has made a career out of trading pullbacks (among other things) and he has a trade alert service you can follow where he takes all the guesswork out of trading decisions. Here’s an example of how simple his trade alerts are:
But if you’re more inclined to do the work on your own to make money in the stock market, then 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 equal to 2 ATRs above the entry price. We set a stoploss equal to 2 ATRs below 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 stoploss for that one trade, our account balance goes down by 2%.
- We take two pullback trades per week. In reality, some weeks don’t have any pullback trades that set up, and some weeks have a boatload. We aim to take two trades per week on average.
- We stay in trades a maximum of one week.
When you combine this trading plan with our pullbacks test, it shows an average return of 24.5% per year. That’s a juicy return for two trades per week. And you can of course 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.
In fact, if you dialed up the trading volume and made pullback trades every day, 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 has been a great approach to making money in the stock market historically, there are periods where pullbacks don’t work so well. It can be hard to predict when these periods come up.
What we choose to do is keep trading them when they set up because over the long term, they have a history of paying off. But we can tell you from experience that it can be hard to do that during periods where there are consecutive losses! If you had found a way to do that for the last 20 years, though, you’d likely be sitting pretty right now financially.
Get Educated by a Pro
So far, we’ve given you two rock solid ways to make money in the stock market: buying SPY for the long term and buying pullbacks. These are golden strategies and we are perfectly happy using those two approaches exclusively. But perhaps you’re looking for something more.
If you want to actively trade in the stock market every day and perhaps even want to explore the idea of making a career out of it, then you might be looking for a lot more education than can be provided in one article.
If that’s the case, then picking a pro to mentor you could be a great next step. The problem is that there are so many people who claim to be “pros” and it’s hard to tell who’s really good and who’s full of hot air.
We have experience with the stock market education course at Investors Underground. The guy who has been running it has been a profitable trader for many years. He’s personifies the active stock market trader in the sense that he has 5 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. So it’s basically like you go through the educational material and learn the trading setups and the techniques, and once you have a working knowledge of those then you join the chat rooms and see all the ideas that come up 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 trading ideas. You’re learning trading techniques and also getting leads from some trading pros.
It’s a big investment to go this route (both financially and in terms of your time), but for many it’s a dream to be a full-time trader and to be out there trying to make money in the stock market every day. If that’s the case, Investors Underground may help make your dreams come true.
If you want to know how to make money in the stock market, you have to first decide how active exactly you want to be.
If you want to be making money but want as little work as possible, consider following Warren Buffett’s advice on buying and holding the market. It’s very simple and could offer a great return over time.
If you want to be a little more engaged in the stock market and want a potentially higher return, buying pullbacks is a reliable approach that is both simple and repeatable.
If you want to become a full-time trader, then you can either trade pullbacks more frequently or you can get educated by a pro to get the in-depth training needed to become a professional trader.
You now have the keys in your hands to try to make money in the stock market!