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The Universal Truth of Trading

InvestorEducation / Learn to Trade Nov 04, 2014 - 10:38 AM GMT

By: Money_Morning

InvestorEducation

Shah Gilani writes: Last week I asked you to send me your top five questions about money and investing.

Thank you, all, for the many queries you sent in.

However, today I’m going to answer only one question.


This question is about getting started.

Getting started is extremely important – and we do it all the time.

You get started every time you make a trade, every time you pick an investment. So, you should treat every position you take like you’re starting over.

It’s that important…

Q: Everyone has opinions – bear/bull market, don’t buy bonds, sell and take your profits, buy XYZ stock… For a beginner, how do you figure out the best way to start investing? Thank you!
-K

A: That’s a great question, because it speaks to the heart of the matter. How do you do it?

There’s good news and bad news in the answer.

First, the bad news. There are almost innumerable ways to trade and invest and more “how-to” books and Web sites than any individual can count. And there’s a lot of great advice out there in the information-overloaded world.

However, there’s no single starting point that encompasses a universal truth from which you can launch headlong into the investing game and be successful.

The good news is… there is a single universal truth from which you launch yourself. And even better, that truth, if you employ it above all others, will make you successful.

Here it is. There is no “figure out the best way” strategy. There is only the position, putting on the trade, getting into it.

Make no mistake. All “investments” start out as a trade. It doesn’t matter if you’re putting on a stock trade, a bond trade or a commodity trade – it’s a trade.

There are only two directions the trade can go in: in your favor or against you.

Now, I’m going to digress here for a moment, and then come back to what you should invest in and when.

Personally, I can trade anything. I have traded stocks, bonds, commodities, currencies, packaged products, options, forwards, futures and derivatives – all quite successfully. I’m not an expert in everything I have traded, by any stretch of the imagination. But I have made money trading everything.

How? Because it’s a trade. I’m either going to be right and make money or be wrong and lose money. And for me, not doing a trade is itself a trading decision.

The game is all about making money, nothing else. It’s not about being an expert. It’s not gambling either. It’s simple. Do you know enough about where your trade may go to make money?

It’s not about overanalysis, nor is it about jumping in on a guess. Making money in the market, any market, is about what YOU know, or think you know. That’s why I can trade just about anything be comfortable and, far more often than not, make money. I trade on things I understand – not that I’m an expert in.

If I’m wrong, I get out. If I’m right, I stay in the trade. Sometimes I stay in for a long time, which make it an investment holding.

So, how YOU do it? Obviously, start with something you know something about or are interested in enough to keep tabs on. Then you buy some shares. Then you manage the trade. You have to be in it to win it.

Here’s a real-world example. A young lady at a TV studio where I was appearing asked me the exact same question. And I gave her the same advice, along with some more that I’ll give you below. She understood she had to make a trade to be in the game and asked me what she should start with.

I asked her to tell me what she was interested in. She liked fashion. I said pick a fashion stock. She didn’t hesitate.

She blurted out, “I really love Michael Kors clothes.” I said, “Then start with Michael Kors.”

And she did. She didn’t hesitate. She did some homework on the stock (NYSE: KORS) and the company, and she jumped in. The following week she told me she bought a few shares at $80.

She was happy when they were at $100. I asked her if she had followed my other “trade management” advice, and she said she hadn’t. She was going to keep the stock because she was up so much.

She ended up selling it back down where she got in – actually a little lower.

Now, here’s the advice you need. Make a decision to get into a trade because you believe (there’s no such thing as “knowing”) you understand the company, what it does, how it does it, how it makes money and whom its competitors are. Buy a few shares if you think they are going up. That’s how you start.

You could buy a tech company, you could buy an industrial company, a fashion company, an ETF based on oil, or corn, or a basket of financial stocks. The only thing that matters is that you think you understand what might happen. Then there’s trade management.

You’ll never panic when you put on a trade if you know how much money you’ll BE COMFORTABLE LOSING.

Don’t lose more than you can laugh at. It’s not a laughing matter, but if you lose a little and chalk it up to a learning experience (and you better figure out your lesson on every losing and winning trade), then you can keep trading. The more comfortable you are with understanding how much you can lose and be comfortable actually losing that, the more you will actually make.

Before you put on the trade, have a trade management plan. If it goes down a certain amount, get out and figure out what happened. Why did the stock go down? Was it something the company did? Something a competitor did? Did a falling market drag it down? What happened?

It is NOT important that you lost on that trade. What’s important is that you understand WHY the stock went down.

Losing is not about you losing money (though it is in a secondary way). It is about you understanding why the stock or ETF or commodity went down.

If you understand, then you’re not a loser. You’ve won by learning something, by gaining more experience, by understanding.

That’s everything. Understanding makes you comfortable. It’s power. It gives you power to believe it is YOU who will make money, it is YOU who controls your destiny.

Trade management is knowing where you’ll get out if you start losing on the position. And it’s about what you do when you’re making money.

There are many fun and profitable ways to manage the winning side of trades.

We’ll get to them in due course.

Let me know if this was helpful. It’s worked for me for 33 years. I’m never afraid. I love to trade.

I hate to lose. But when I do, I always study what happened – I try to understand.

After all is said and done, trading and investing isn’t complicated. Wall Street just wants you to think it is so you go running to them for advice – so they can soak you.

You can trade and invest and make a ton of money. It really isn’t rocket science

It’s mostly basic common sense, understanding who you are… AND TRUSTING YOURSELF.

I’ll be answering some more of your money questions later this week. See you then.

Source : http://www.wallstreetinsightsandindictments.com/2014/11/universal-truth-trading/

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Disclaimer: Nothing published by Money Morning should be considered personalized investment advice. Although our employees may answer your general customer service questions, they are not licensed under securities laws to address your particular investment situation. No communication by our employees to you should be deemed as personalized investent advice. We expressly forbid our writers from having a financial interest in any security recommended to our readers. All of our employees and agents must wait 24 hours after on-line publication, or after the mailing of printed-only publication prior to following an initial recommendation. Any investments recommended by Money Morning should be made only after consulting with your investment advisor and only after reviewing the prospectus or financial statements of the company.

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