How Do You Make Money in the Stock Market?

One of the most common questions we receive at YellowTunnel is “How do you make money in the stock market?” With over fifteen years of personal trading experience and having spent the last few years teaching the in’s-and-out’s of the stock market, I’ve pinpointed several key factors that are conducive to a higher ROI. Having a strong trading plan or good portfolio management skills are some of the ways I believe traders find success, but one of the most overlooked aspects of the stock market is Trading Psychology. 

The Psychology of Money by Morgan Housel helped inform and inspire a lot of the fundamental values I try to enact in my own trading. Essentially, there are two overarching factors that often dictate trading: personality and circumstances. But this is not only true for making money, it is also true for losing money. A certain set of circumstances could lead to a harder path to profit while a certain type of personality could propel them, and vice versa. As with all traders, the goal is to make money--which there are many ways to do--but the true challenge is staying wealthy.

With this in mind, Housel identifies one key method to staying wealthy: some combination of frugality and paranoia. The reason for frugality seems pretty self-evident while paranoia might catch some by surprise. Mainly, the idea here is that fear is a powerful emotion and therefore a powerful motivator. Along with this, at YellowTunnell we also strongly adhere to the notion of Compounding Investment- earnings generating earnings. We want to make money off the interest created by a profitable investment. The logic-defying profits of this method is exactly what we are aiming for at YellowTunnel.

We’ve distilled these ideas into four simple steps: portfolio allocation, portfolio drawdown, POS vs ROC, and managing entry/exit points. First, we always recommend having cash in your portfolio and never buying on margin. The higher the likelihood of a market correction, the more cash we recommend having on hand in relation to your personal risk tolerance. Second, we want to preserve wealth. For portfolio drawdown, we recommend traders maintain a set number of positions (new traders should start with less) and a set percent of the portfolio per trade. For example, if you are starting with four positions at 2.5% of account value per trade you are risking no more than 10% of your total account. These first two steps, in my opinion, are often the biggest influences on successful and unsuccessful trading.