Many trading advice expressions have been coined to describe the dynamics of the stock market. These adages remind us to avoid traps and seize opportunities. Here are some of the most common ones that reflect important insights about the markets.
The trend is your friend
Some traders believe they need to behave differently in order to make smart investment decisions. The challenge is that the trend is reality. It represents the collective actions of all market participants.
When the broad market is trending higher or lower, so are most of the stocks in it. Rather than bucking the trend, acknowledge the direction of the overall market and plan your trades accordingly.
Don't try to catch a falling knife
This saying applies to buying a stock that is falling sharply. Just as it is dangerous to try and catch a knife falling to the floor, it can be just as risky to buy during an aggressive sell-off. If your analysis indicates that now is a good time to buy it, act accordingly. 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 the rumor and sell the news
This adage reminds us that rumors can drive a rally or a sell-off in a stock. People speculate on the impact of a rumor, and this speculation gets baked into the stock's price. If the rumor is proven to be true, then the impact might already be reflected in the price. If the rumor isn’t true, then the stock is still likely affected. 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 noticing when a company can seemingly do no wrong or 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.
Proverbs to remember
It is no accident that these sayings have endured. They capture something about how people relate to markets and how markets affect people. These adages would be long forgotten if they did not speak to deep market truths, so keep them in mind.