How to Get Rich in the Stock Markets

These days everybody wants to know how to make the money back that they lost in the stock market. Clearly the answer isn't to trust a financial adviser because they are likely the person who lost your money to begin with. Seventy-percent of mutual funds under perform the S&P 500 and over the last two years most of them are down double digits. So you may have considered learning to invest your money on your own. Surely you couldn't do any worse than the so called expert advice that you've already received you think to yourself. Amidst all the doom and gloom it's easy to forget that there are a handful of savvy people who make money in the markets whether they are going up, down or sideways.

The Power of Compounding

The first thing you need to understand is how the stock markets can make you rich and why your job, unless you are the CEO, or have lots of stock options, almost certainly never will. Einstein called compounding the eight wonder of the world. Everybody has heard this riddle. Which one would you rather have $10,000 or a penny that doubled everyday for thirty days? Most people choose the $10,000 never stopping to do the math on the doubling penny. Because for the first twenty days the growth is slow and you only have just over $5,000, but by the end of the thirtieth day you have just over $5,000,000 and that is the power of compounding. So unless you are getting some very large pay raises the chances are that you're pay check grows linearly, while your earnings in the stock market, if you are doing it correctly can grow exponentially.

Find the Trend

One of the most important lessons to know about the stock market is to not trade against the trend. The question is how to determine the trend. One of the simplest ways is to use a 200 day moving average (DMA) . If the market is trading above the 200 DMA the market is in an uptrend, if it's below the market is in a downtrend. So you first want to find the overall trend of the S&P. If it is in an uptrend you want to look for stocks that are also in an uptrend to purchase. If the S&P is in a downtrend you want to look for stocks that are in a downtrend to short sell.

Buy Strong Stocks, Sell Weak Stocks

Obviously you want to buy strong stocks in an uptrend, and short sell weak stocks in a downtrend. The question is how do you determine if the stock is weak or strong. One of the easiest ways is to go to the Investors Business Daily website and use their stock grader. When you type in a ticker symbol the site will give you a letter grade from A-E. You want to buy stocks that are a B+ or above and short sell stocks that are a C+ or lower.

Buy Stocks When They Drop, Short Sell Stocks When They Rally

Most times even a strong stock that is an uptrend will pull back and take a breather, likewise a weak stock in a downtrend will usually have a few days when it rallies. This is when you want to enter the stock at either a support or resistance level. You can find some handy tools at a website called Trading Markets that will help you to determine when to enter a stock.

Putting it All Together

So how does one make money in the stock markets?

1. Determine the trend of the S&P index
2. If the stock market is in an uptrend buy stocks, if it's in a downtrend short sell stocks
3. If you are buying stocks, buy the strong ones with a grade of B+ or better. If you are short selling, sell weak stocks with a grade of C+ or lower.
4. Buy weak stocks on a pullback, short sell weak stocks on a rally.

Making Money in Sideways Markets

So the only question left is how does one make money in sideways markets? Well the simplest answer is to use options. Most people think that options are very risky and complex, but the truth is that if you don't know how to use options you are ignoring one of the most useful tools there is in the financial markets. By using a combination of easy to learn trading techniques such as covered call writing, credit spreads and iron condors it is easy to make money whether the markets go up, down or sideways.