How I (Anyone can) Make Money in The Market

— My Simple Two-by-Four Approach —

My simple 2-by-4 Trading and Investing Methodology introduces two goals and four rules. First let me say that we need to always think like an investor but understand that every investment begins and ends with a trade. We want to master the mechanics of trading to better achieve our investment objectives. The following summary information is based by my experience in the market for tradable securities. The following also assumes that you have an appropriately funded brokerage account and know how to enter a Limit Order to request a trade. But you need help to make those savings grow to meet your future needs. To that end, I have two goals: A primary and a secondary; and a set of four rules that once mastered make it much easier to be successful on Wall Street.

  1. The Primary Goal is to be Consistently Profitable.

  2. The Secondary Goal is to make our profits as quickly as possible.

Our Primary and Secondary Goals require us to earn money at the best rate of return the market and our skills permit. Learn, and in time master, the following rules and you too will be able to achieve these two goals.

  1. Focus on a few Dissimilar Survivable Investments that Pay you to Hold.

  2. Trade like a Professional Value Investor.

  3. Keep your Operations In-Sync with the Health of the Broader-Market Trend.

  4. Be about the Business of Growing Your Wealth.

My simple 2X4 approach is based on the following assumptions, which are derived from my three plus decades of experience in saving, trading, and investing for retirement.

This simply 2X4 approach has empowered me to reach our Financial Freedom Number (the amount of money we need to earn every month on average to quit our jobs and live off our savings). Let's take a closer look at this approach.

— The Primary Goal —

Commit to being Consistently Profitable. Our Primary Goal is to be a Consistently Profitable Trader (CPT). Economic Boom-Bust Cycles You may be thinking, my primary goal is to generate wealth and grow the size of my account. I know from firsthand experience that the best way to generate wealth and grow the size of any account is to be a CPT. A CPT is not someone who never makes a mistake, never has a losing trade, nor has an equity drawdown, as the name might suggest. A CPT is someone who can reliably generate more profit than loss. That is, they are able to always put more profit into their account than they lose in their average Operational Timeframe (OT). Examples of an OT include an economic boom-bust cycle (as seen in the first chart), a year, a quarter, a month, a week, or a day; and can also be any multiple of the prior single examples, like every six months. At the start of every OT, say at the beginning of each month, start at zero and add all of your profit (i.e., capital gains, dividends, interest, and any other income earned), then subtract any losses and operational costs. The result will be your Profit or Loss (P&L) for that interval of time. The goal is to have a positive number at the end of each OT. If you can't do this, try a longer OT, like every 60- or 90-days, and expand that interval of time until you find an OT that yields CPT status. Or until you figure out why you are losing so much, and then stop doing that! Tracking our monthly P&L is one very good way to keep score because that has us focus on our profitability. We can use a twelve-trailing-period average as our true measure of CPT success as this allows us to employ a rare Stop-Loss trade that can fortifies returns in a subsequent OT. Another important way to keep score is to track the growth of our account. If we were to plot an equity growth curve (the value of our account over equal measures of time, like at the beginning of every month or quarter), that line should generally go from the lower left to the upper right on that chart (from less value to more; and in time, enough value to live on). Don't be surprised when your account equity chart looks like the economy's boom-bust cycle chart or whatever securities you choose to invest in. Initially, most of this growth will come from regular savings, but in time your CPT operations will do the heavy lifting. Note that it is easier to earn CPT status in longer OTs. But in time, everyone should be able earn CPT status in a quarterly timeframe, which is the cyclical period that all stock companies must report their earnings and many payout dividends. Most stock companies do a very workable price cycle up and down within this 90-day window as best seen in a weekly chart of that ticker. CPT status is of primary importance because compounding will naturally occur over time and will magnify whatever trading results we realize over any OT. A string of profits, no matter how small, will cause our equity growth curve to turn up over time, a very desirable outcome, and after many years can allow us to retire in comfort. But a string of losses (like a string of unnecessary expenditures) can simply hollow out a savings account and can force you to work in a more traditional job for the rest of your life. Note that capital losses cause us to not only lose prior savings, but also the growth in those savings and the time it took to do both. Capital losses force us to reset our investment clock, but we can never redo any prior interval of life; and this is why maintaining CPT status should always be the primary goal. We simply must commit to avoiding all trades and investments that have any likely possibility of forcing us to permanently give our money to Mr. Market. The easiest way to attain and maintain CPT status is to only take on trades (own investments) that will pay us to hold and that are likely to yield an acceptable profit sooner or later, and to simply avoid all other trades that require good luck or skills that we have yet to master. Do not dismiss the importance of this primary objective. Anyone who fails to realize and maintain CPT status is very unlikely to ever realize and maintain real long-term growth on their savings when exposed to higher yielding market forces. Cyclically erratic (volatile) market forces allow us to Buy Low and Sell High, which most people mistakenly assume is the primary goal, but is in fact too simplistic, far easier said than done, and not the only way to achieve and maintain CPT status. So, our primary goal is to do what we reliably can to increase the size of our account (i.e., to put money in our account on a regular basis) by saving on a regular basis and by only doing those things that are likely to yield a positive rate of return.

— The Secondary Goal —

Work to realize your best possible rate of return. Our Secondary Goal should be to maintain CPT status in our Optimally Effective Timeframe (OET). Rate of return is a function of time and ability. A dollar made in a week has a higher rate of return than a dollar made in two weeks. Compounding higher rates of return causes our equity curve to turn up sooner and move up quicker. It is always best to make money as quickly as possible. But there is a big problem with this secondary goal, the quicker we try to make a profit, the harder it becomes and the more likely it will be that we are unable to maintain CPT status, which can cause our equity curve to turn down. In fact, way less than 1% of all market participants will ever achieve and maintain daily CPT status, and that is why most wannabes day-traders get wiped out. I believe anybody can achieve CPT status over an economic boom-bust cycle, most can grow to achieve yearly CPT status, many can even achieve quarterly CPT, and in time some may be able to achieve monthly CPT status, if they think like an investor and properly apply the following trading rules. So, this secondary goal has us keep the bulk of our capital focused on our best OET, while we use a small percentage to probe the next slightly quicker timeframe (improve our trading skills). Once we start to realize CPT status in the next quicker timeframe, we can then slowly increase the size and number of our positions to yield that higher rate of return, while we start to probe the next slightly quicker timeframe. At some point, we will simply be unable to achieve CPT status in the next quicker time, and the current CPT timeframe will be our Optimally Effective Timeframe, the best rate of return we're capable of earning. But please understand that market conditions can change and so can our ability to master new skills. So, our OET can and will change over time. We need to adjust accordingly to always earn our best possible rate of return, which may require us to patiently hold a survivable investment until Mr. Market is willing to pay us an acceptable profit that can be re-invested to realize a positive compound growth rate.

— Rule No. 1 —

Focus the bulk of your time and capital on a few dissimilar investments that are very likely to survive, that will pay a market rate of return to hold, and that are likely to see higher prices sooner or later. Some common investment examples include: A U.S. Large-Cap Index Fund (e.g., SPY), a U.S. Small-Cap Index Fund (IWM), an International Index Fund (EFA), and a U.S. Bond Fund (BND). The price per share of these example ETFs requires a lot of money. If you are just starting out and cannot afford to buy even one share, start by Dollar-Cost Averaging (DCA) into one or two traditional index funds (like at Vanguard Funds). Use this time to develop a feel for Mr. Market's nature while building the size of your investment capital. It takes a lot of money to make meaningful amounts of money in the markets; and the more we have to invest, the easier and safer it becomes to make more with a lower risk of being forced to take a permanent capital loss. There is simply no need to take a capital loss in an investment that can survive market volatility, that will pay you to hold, and that is likely to yield an acceptable profit sooner or later. You cannot become a CPT if your trading strategy requires that you take a loss whenever the market turns against your position, which is likely to happen a lot. You simply must avoid positions that can result in any permanent loss of capital. Like the pros, we need to become a specialist in our chosen survivable securities. Knowing how these securities support their market value and seeing how they acted under prior news and commentary allows us to better predict how they should trade in the future, and that creates a real competitive edge and the main reason the pros specialize. Furthermore, a big chuck of our CPT profit can come from income earned while waiting for that acceptable capital gain, and that's the primary reason to focus on securities that'll pay us to hold. Learning how to profitably trade around a few core positions is true professional investment wisdom. This is my Optimal Stop-Loss Mechanism.

— Rule No. 2 —

Trade like a professional value investor. Buy low and only sell at some higher price to book cyclical capital gains over-and-over again to be a CPT. This will require patience, sometimes a lot of patience, and that is why we need to focus on survivable investments that will pay us to wait for our next capital gain. Ideally, we want to only Be a buyer at below-average Discount Prices and a Seller at above-average Premium Prices as indicated by the range of prices seen on a chart of the security, we've chosen to invest in. Charts allow us to leverage the wisdom of crowds, to see what professional traders and investors are doing with their money, which can help us to see when it is better to buy, sell, or wait for better prices. Discount prices exist in the lower half of the trading range seen in the chart and premiums exist in the up half. Stock and bond market prices are forward looking, they are anticipatory. Because they are forward looking, they naturally trade in a dynamic Trading Range that reflects the market's collective view of fair value, which professionals call a Support and Resistance (S/R) Channel. Support & Resistance Channel Refer to the second example chart that shows two trading ranges (S/R Channels). This pattern of price behavior can be seen in any chart timeframe, like on any intraday, daily, weekly, or monthly chart. These trading ranges exist in multiple timeframes. It is far easier to become and retain CPT status in bigger timeframes. Bigger trading ranges exist in longer timeframes. That is, the size of an S/R channel seen in a monthly chart will be larger than that seen in a weekly chart of the same ticker, and that smaller channel will be somewhere within that larger channel. The same can be said for the difference between a weekly, daily, and hourly chart of that same ticker at that time. These S/R Channels are all subject to change as news and commentary hit the market. All S/R Channels can expand and contract. Furthermore, S/R Channels in quicker timeframes are more likely to shift up or down as prices cycle (trend up and down) within the next broader timeframe. Refer to the second chart again, which shows prices breaking out and that channel shifting up to a new higher trading range. Although not shown, it is possible that the higher S/R Channel later shifted back down. It is also possible that it shifted up again expanding or staying within the next bigger channel in the next broader timeframe. It's all this continuous price movement (volatility) that makes it so hard to buy the lows and to sell the highs. Prices can always go lower after we buy and higher after we sell. We need to learn how to be okay with this outcome because it will happen a lot. Don't worry about the money left on the table. Focus on the profits you're able to earn and that you can re-invest to realize a compound growth rate. Given all this volatility, we need a way to improve our odds of success, to be a CPT in our OET. The answer lies in understanding that prices are likely to stay within the current quicker trading range for a little while, but even more likely to stay within the trading range in the next longer timeframes, and so on. And all this channel shifting up and down is very likely to stay within the broadest trading range (between Major Support and Resistance, which is often close to the 52-Week highs and lows seen on a monthly chart). This is why professional investors prefer to scale in and out as market conditions evolve. Be a factional buyer at current and bigger discount prices (in the lower half of the current trading range and in the lower half of the next broader trading range when given better discount prices. Patiently waiting for prices to recover in the current or next longer timeframe. Using LIFO or Assigned/Specific Lot accounting, only be a fractional seller at current premium prices when you have an above average profit to harvest or whenever it looks like the market is likely to take back an acceptable profit. Thus, supporting our goal to be a CPT. Scaling in and out allows us to convert our single buy-low and sell-high trades into two averages that can be managed and optimized. A professional value investor specializes in one or just a few investments, and scales in and out based on market conditions and the amount of available cash they have to invest in that security. When cash levels are high, we don't need to see much of a discount to buy a little. But as our cash reserve goes down, we'll need to see bigger-and-bigger discounts to justify any additional commitment of capital. We can learn how to work (convert a near-term paper loss) into an acceptable longer-term profit; and in time, we can learn how to grow our capital at an above-average rate of return. When we are first starting out and while our capital base is low, only trade in longer-term trading ranges. This is going to require a lot of patience and persistence. But in time, the size of our capital base will grow, and so will our ability to see and work quicker (smaller) channels. We simply must average in as prices approach the bottom of the current and next broader trading range, and average back out as our prior buys yield above average or at least acceptable results. We must learn how to work whatever market we get. Only buy low, at timeframe relative discount prices, and then hold and work the position until you've earned a market appropriate profit. Do whatever it takes to maintain CPT status. This approach can require a considerable amount of patience and self-disciple, and that is why we need to focus on investments that can survive volatile markets and that will pay us to hold. This is true professional investment wisdom. Taking acceptable, preferably above average, profits when available and working to minimize the impact of unacceptable losses or, better yet, working (or waiting for the market) to convert an initial loss (a drawdown) back into an acceptable profit is key to maintaining CPT status. Learn how to profitably trade around one or just a few core positions. Take quicker above average profits when available, and work to manage and optimize your averages relative to current market conditions when you must do so to maintain CPT status. This too is professional investment wisdom. The size of our account will grow as we master this rule. In time, we'll be able to consider more volatile alternative investments, like those blue-chip securities within our initial index that have favorable relative strength (i.e., one of the few tickers that are pulling our index higher while in a broader uptrend). It's how many of the biggest and best investors (traders) operate, and it's how we too can generate real wealth in due time.

— Rule No. 3 —

Keep your Operations In-Sync with the Health of the Broader-Market Trend. Wilshire 5000 Total U.S. Stock Market Index Market prices trend, up, down, and sideways, mostly within a broader (e.g., 52-week) Trading Range. We can use the current price action relative to historic price pivots (prior highs and lows) and a standard set of Simple Moving Averages (MA) to gage the health of that trend. Refer to the daily chart that shows prices in a healthy up trend. Prices are riding the green 200-day MA higher. Notice how most prices bounce off that 200-day support level, putting in mostly higher pivot lows. This is a sign of a healthy up trend. When prices get too far away from (above) that MA, prices find resistance and put in a pivot top. A pattern of mostly higher pivot highs. We can draw a line through these pivot highs and project that into the future to see the likely top of this broader S/R Channel. We can use the 200-day MA on this chart as the likely bottom of the same channel. But everything is subject to change over time, and we need to learn how to work the market we see. Simply put, a healthy trend is likely to continue, and an unhealthy trend is likely to reverse. The primary trend is very likely to continue until prices reach the top or bottom of the current trading range where the primary trend reverses, putting in a chart pivot. How prices trade relative to the standard 20-, 50-, and 200-period MAs is another good way to judge relative price discounts and premiums. When prices are trading above and finding support off a rising MA, the market is signaling bullishness, and prices are trading at a broader relative premium. Alternatively, when prices are trading below and finding resistance at a falling MA, the market is signaling bearishness, and prices are trading at a broader relative discount. This price action is likely to continue until prices approach a prior 52-week pivot high (a prior major resistance level) or pivot low (a prior major support level) as best seen all monthly charts that have a full 200-month MA and on most weekly charts. Generally, when prices fail to make a higher-high on more bullish news and commentary, we're at likely major resistance. This is particularly true in longer timeframes when prices are near the top of the chart. It is then time to take profits and to minimize losses in riskier trades. Alternatively, when prices fail to make a lower-low on more bearish news and commentary, we're at likely major support. Here too, this is particularly true in longer timeframes when prices are near the bottom of the chart. Rule number three is my Ideal Stop-Loss Mechanism.

Learning how to see patterns with favorable odds is a good way to improve our rate of return; and learning how to see and trade with a healthy broader-market trend is a perfect example. Let's take a closer look at this chart (or any set of charts configured like this). As noted above, chart pivots define the size of the current Trading Range (S/R Channel), and trading ranges exist in Multiple Timeframes. Example timeframes include a month, week, day, and an hour, and can be seen on charts set to each timeframe. We want to keep our operations In-Sync with the Health of the Broader-Market Trend. With that restated, I suggest that we learn how to analyzing a ticker in multiple timeframes. Dr. Alexander Elder's introduced his Triple Screen Trading in his classic book Trading for a Living, where he suggests that we use the next longer timeframe to set our trading bias. For example, let's say we're trading the weekly chart. We'll use a healthy trend in a monthly chart to determine if it is best to go long or short. A lack of a healthy trend indicates that it is best to just wait in cash for a better trading environment or look elsewhere for better odds of success. We'll use the current (weekly) timeframe to enter and exit a trade. Assuming a healthy trading environment, we'll use a counter trend move into support or resistance to enter, add to, exit, or reduce the size of our position. We'll use the next shorter-term (daily) timeframe to time the trade as prices begin to move with the broader-market (primary) trend. This is a true professional trading tactic with very favorable odds.

But first we need to better understand what each chart is showing us. On a daily bar chart, each bar summarizes the trading range data for each day (bar) on the chart with the latest data (bar) being (created) on the far right edge of the chart. On a weekly chart each bar summarizes a week of data, but it takes a week to finish generating the next bar. Longer-term charts naturally show bigger trading ranges and are more fundamentally grounded because the biggest and best portfolio managers operate mostly in longer timeframes. These pros can properly do the fundamental analysis that guides their market operations. On Wall Street, money naturally flows to the best investors and so the size of their portfolios grows. It just takes time for them to adjust their asset allocation without negatively impacting their rate of return. This is a profitable insight. You want to see what these pros are doing and invest with them. Focus on trade volume, big money creates bigger than average volume as best seen on longer-term charts. Longer-term charts are also more likely to show the range of likely future prices, just project the current broad S/R Channel into the future. There will be surprising exceptions, but the overwhelming majority of all future prices are likely to be within the highest and lowest prices seen on a monthly chart. If your security cannot fill a monthly chart, it may not be a survivable investment. An investment that has been trading for a decade or more is likely to be around for another decade, when the economic value backing that security is likely to be desirable in the future. Buys in the lower half of a broader trading range of a survivable investment are more likely to see profitable prices sooner or later, and this is a very profitable insight. But it is hard to be patent and that is why new traders and investors gravitate to quicker timeframes. There are even quicker intraday timeframes (e.g., 1-, 5- and 15-minute charts), but these are too noisy and erratic for most to profitably trade. Plus, few have the time and ability to just sit and watch intraday charts while they wait for a favorable setup. And if you don't wait for those favorable setups, you are just competing with the Fast Money, the best professional traders in the world. If you are going to compete with the best traders in the world, don't be surprised when you lose CPT status and give away more-and-more of your trading account. However, it is not that hard to periodically check a longer-term chart to see if current market prices are supportive of our need to maintain CPT status. Let me repeat, It is far easier to become and retain CPT status in longer timeframes. As indicated above, these S/R Channels exist simultaneously in multiple timeframes with bigger (longer) timeframes having bigger channels that contain smaller (quicker) channels (i.e., smaller trading ranges within bigger trading ranges within even bigger trading ranges). These S/R Channels have a noisy, erratic, quasi-fractal (self-similar) relationship. Remember, all channels have a tenancy to expand and contract based on investor confidence that is subject to change. They also tend to shift up and down in quicker timeframes within their next broader timeframe in response to surprising news and commentary. This is the biggest problem facing traders and investors. Many professional investors rely on their version of Rules 1 and 2 above to effectively deal with this problem. Professional traders rely on their ability to let their winners run and cut their losers short. However, most retail investors will never master that skill and will just lose too much of their savings on the way towards this realization, which is the justification for rules 1 and 2 above. Rule 3 can be used to better judge when it could be best to exercise a stop-loss trade. But don't be too quick to give your money to Mr. Market. Only do this when it becomes clear to the more experienced version of you that a stop-loss here can empower a later loss recovery. Note that Rules 1 and 2 give you the option to hold a drawdown, which is generally best for most new investors.

— Rule No. 4 —

Be About the Business of Growing Your Wealth. This rule is all about having the right mindset and persistently doing those things that are likely to generate prosperity in the markets. It turns out that our lazy, free-spirited nature is our true worst enemy on Wall Street. We simply must find the self-discipline to develop and execute a repeatable pattern of behavior that can yield a positive compound growth rate. Never forget that we're mostly competing with big professional investors. So, don't be surprised if all this feels a lot like work. The better rates of return that are possible on Wall Street will require time, money, skill, and effort. Rule number four requires that we develop and maintain a Watch-List and an associated iterative analytical and trading methodology. Using the three rules above, we want a simple, repeatable process that plays to our natural abilities to monitor and exploit Mr. Market's on-going activities. It is very hard to predict future prices, but it is not that hard to periodically monitor the current price action to decide if it is now better to buy, sell, or wait for better prices. This is a time-tested professional technique and is the best way I know to grow from a Beginner to a Consistently Profitable Trader (someone who can use positive compounding to generate real wealth in the markets) to a True Market Professional, (someone who can make a living in the markets, preferably on their own retirement savings). We want to have a small list of ticker symbols to focus on (specialize in) and a simple iterative process to 1) find favorable trading opportunities, 2) plan-out each trade and then trade the plan, and 3) learn from the results. Like all profitable businesses, we need to maintain a good set of books, our trading records. So that we can mark our investment Profit & Loss (P&L) details to current market prices. With each iterative pass, this allows us to know if it is now better to be a buyer, a seller, or just wait for better prices. Don't be surprised if most of the time we're just waiting for better prices, and that's why we need investments that'll pay us to hold. This iterative analysis also allows to set and adjust favorable limit orders, which is the best way to tell Mr. Market that we're willing to make a trade, if he'll do that trade at a price that we feel is favorable to maintaining our primary and secondary objectives. Mastering this rule is the key to becoming a True Market Professional, and that can get you to and through retirement.

— More Information —

A friend, let's call him or her Sam, asked me for a more concrete example of how s/he could apply my Simple 2X4 Approach in the current market. Here's a link to an edited version of my email response to that request. Here are some other web pages to consider. The first takes a closer look at My Trading Insights & Approach, the second is a set of rules that govern my Retirement Planning, the third takes a deeper look at the Economy and Markets, and the last takes you to a summary look at my trading business. Some of this may be redundant, and I apologize for that. Writing and revising these papers helps me to better understand and remember what I've learned, need to bear in mind during the trading day to protect myself from the emotional whirlwind that Mr. Market unleashes, and that may hopefully help you along your way to becoming a CPT and maybe a true market professional. This I have done, and there's nothing special about me; so, I say with confidence, you can do it too, if you are willing to work for it.

Stan Benson