Like the people who drive it, markets can sometimes appear to act irrationally. As the economist John Maynard Keynes said, "Markets can remain irrational longer than you can remain solvent."
Many trading advice expressions have been coined to describe the dynamics of stock prices to remind us how to avoid traps and seize opportunities. Below, we've shared some of the most common maxims traders have used for decades to reflect important insights into speculation of market movement.
"The Trend is Your Friend"
Some traders believe they need to be different in order to be smart or make money. The challenge is that the trend is reality. It represents the collective actions of all market participants.
When the broad market is heading higher or moving lower, so are most of the stocks in it. This creates momentum. Rather than bucking the trend, acknowledge the direction of the overall market trend and plan your trades accordingly.
"Don't Try to Catch a Falling Knife"
This saying applies to buying a stock falling sharply. Just as it is dangerous to try and catch a knife falling to the floor, it is risky to buy a stock selling-off. If your analysis indicates that now is a good time to buy it, you should. But, don't buy just because it is "on sale". We've all seen that item in the store that is marked down 10% and three weeks later is marked down 25% or more. Purchasing these "sale" items early on can put a dent in your trading account.
"Buy on the Rumor and Sell on the News"
This saying reminds us that rumor can drive a rally or a sell-off in a stock. People are speculating on the impact of what they have heard and this is getting baked into the stock's price. If the rumors are proven to be true, then much of the impact may already be reflected in the price. If the rumors aren't true, this can also impact the stock because those rumors were likely priced into the stock. In short, remember that stocks often move on speculation and then adjust when the news is official.
"Be Fearful when Others are Greedy and Greedy only When Others are Fearful"
There are long term uptrends and downtrends, but at a certain point the market pendulum will change direction. Timing is difficult, but it is worth paying attention to those times when a company can seemingly do no wrong or when a company can do nothing right. During these times, think like a contrarian and don't become complacent.
This expression is counter to the idea that 'the trend is your friend', but it is really more of a reminder that every trend will ultimately end and it often seems to happen just when it feels like it will go on forever.
"Bull Markets Climb a Wall of Worry"
This expression highlights how markets often trend in spite of how people are feeling. What keeps a market moving higher is that there are more buyers entering the market. The opposite is true when a market keeps moving lower. If you're waiting for everyone to agree on the market, you could be waiting for a long time. Markets can go up when people are still queasy and can fall apart during seemingly good times.
It is no accident that these sayings have endured. They capture something about how people relate to markets and how markets affect people. These sayings would be long forgotten if they did not speak to deep market truths. Keep them in mind.