The Trick to the Stock Market - Go with the Flow

by Jeffrey Lin

Recommended skill level: 1/4 (Rookie)

If you just want to make money in the stock market, is it really important to have inside information from CEO’s and bankers on Wall Street? No. Many people discourage themselves saying, “How in the world would I know when to buy and sell when I don’t live next door to Warren Buffet?” Simple fact is, you don’t need to know a lot of “inside information” to be a successful investor. The first and most important lesson for successful investing is: find a trend (or pattern) and stick with it!

My old economics professors would say, the stock market is random so it's impossible to guess if stocks are going to go up or down next. It's true that each up and down, by itself, is unpredictable. I mean, there are millions or billions of people and companies around the world buying and selling stocks, oil, gold, commodities, bonds, options, futures that it's pure chaos! But there's also been people who say 10 players going after 1 ball on a basketball court is chaos too. Actually the stock market is a lot like sports. You never know 100% for sure if each shot, each hit, or each play would work out. However, players and teams go on hot streaks and seem invincible, then the other team may go on a streak of their own. The cool thing about investing in stocks is you can always switch teams and jump over to the team on the hot streak. Sort of like fantasy sports. The hard part for most people is recognizing a trend or a pattern that can make you money, and how exactly to take advantage of that.

Point is, even in chaos, there's trends, streaks, and patterns that happen for a while. A team may stay in the lead because one person keeps making his shots, or just because the other team keeps dropping the ball. It's probably not going to happen every time, but over time, whether if its a few minutes, hours, or weeks there are trends and patterns that is enough to make a difference.

Think about all the big trends, fads, and celebrities. From Madonna to Lady Gaga, and blackberries (aka crackberries) to iPhones. Who wouldn't want to jump on their bandwagon especially if it could make you money? For most professional investors and traders, staying with "what's happening" is the secret to use the stock market as their paycheck. Investors often look for trends in companies and businesses and betting what's going on with those companies will mean ups and downs in their stocks. Meanwhile, traders focus mostly on the actual price of the stock (mutual fund, futures, options, oil, etc) that they want to buy and sell. And it can get more confusing because not only do investors and traders take advantage of different patterns, there are millions (or more) patterns you can try to make money with. Thats why every expert who writes or talks about a stock idea can be right (or wrong) and they may be talking about completely contradictory things! The good news is with millions of patterns and trends out there, you have millions of ways to make money. But be careful, trends change from time to time, so there'll always be times where you'll need to jump on the next fad and leave Justin Timberlake behind and go with Justin Bieber.

In the next article, we'll explain how trends happen in the stock market, how insider information plays into things, and the most 3 most basic trends in the stock market: up, down, and nothing much.