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The Universal Truth of Trading

10 | By Shah Gilani

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.

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  • 10 Responses to The Universal Truth of Trading

    1. Paul says:

      Thank you for giving us in sight on trading. The way Alibba is trading do you think it will pull up Yahoo along the way, the share price?

    2. Robert in Vancouver says:

      Shah’s advice is great if you are going to be stock trader – trying to buy lower and sell higher than other people.

      I like to follow the Warren Buffet method – find good stocks or ETF’s that pay sustainable dividends that are at least triple the rate of inflation, buy them on the big dips, and just keep them. I only sell something when I see an even better dividend payer and need to raise cash to buy it, or if there is a serious change that will hurt the future flow of dividends.

      After 44 years of doing this, I’m happy getting paid dividends every monthly or quarter rather than trying to outsmart the guys with multi-million dollar computer systems that buy and sell in milliseconds.

    3. ALAN STEINBRONN says:

      Let me put in my 2 cents here in this discussion (and some of you may walk away thinking that my view on market trading is only WORTH that).

      Way back in 1993 when I first started out trading, my inexperience caused me to CHASE Price around like a chicken without its head.

      It didn’t take long before I realized that’s EXACTLY what the big moneybags WANT you to do – CHASE the Price action.

      So I stopped, took a deep breath, and took a GOOD look at the manipulations those big moneybags would do to ‘pull’ traders into one direction, only to reverse Price in mid-air and send it the other way, causing huge loses to fall out of the hands of the ‘suckers’ and into THEIR hands.

      Like taking candy from a baby.

      I’m not about to give away my hard won trading secrets but, I WILL give you a clue to the RIGHT way to trade and smack all those big moneybags right across the back of their heads and take THEIR cash.

      The secret to successful trading is NOT knowing you’re original position is 100% solid correct – or even close – but it’s how you handle Price when it goes AGAINST you.

      Meaning, develop a trading strategy that PROTECTS you, and produces profits, from ANY adverse Price movement against your original position.

      When you get to THAT stage in your trading experience, the markets are your Goose that will lay Golden Eggs for you constantly.

      60% of the time, your original gut feeling and position will be right.

      But 40% of your original positions will be wrong (manipulated by the big moneybags to BE wrong).

      Yes, I assure you, the markets ARE manipulated to take the most cash from investors.

      I mean, c’mon, these big moneybags aren’t in this business to LOSE money (if they can help it).

      ’nuff said.

    4. Sammi G says:

      You know I’ve been following this kind of advice from Shah and the others here at Wall Street Insights and Money Map Press. I bought into a stock when it was reccommended here at 44 cents a share. I have a small 2ndary investment account and bought a meager # of shares. I sold them in 2 blocks as the price went up and was just starting to come back down. part at 2.49, leaving me a “free trade” and the rest on my trailing stop at 1.96. All of these things I did in response to things I’ve learned in these reports such as SHah’s.

      I invested a meager 43.06 and ended up with 171.57 after paying my trade fees. thats not a bad little profit. Imagine how much profit it could ahve been if I’d been “playing with real money” LOL like several thousand dollars rather than pocket change. I sold it when I felt it had gotten as high as I felt comfortable it was going to go. and got my “free trade” and set a trailing stop on the rest. and even tho the stock continued to nose dive I still made a profit on both trades.

      Thanks SHah. Now I just need to do this again a couple thousand times and I can retire w/ a few extra bucks for something fun!

      😉

    5. Frederick says:

      Either way is ok meaning either to trade or to hold the stock as long as you understand what you are doing which is what Shah Gilani also says.Personally I prefer the Buffett way, no trade secrets to safeguard here, the rules are given, its a question of taking the time to study and understand them.And then to apply the rules when buying stocks.

    6. olaf says:

      In these days of BLATANT stock manipulation, free fed money, stock buybacks and HF trading. I don’t think you can rely on fundamentals anymore. These companies are using huge leverage to buy back shares and drive their stock price higher=bigger bonuses for the bonehead managers.

      Learn technicals, day trade or position trade, set buy orders for a small amt of stock first (with a stop loss order) and follow the money if the buy order triggers. At the end of the day take your profits and leave few shares in the mkt with a stop. AND use a low, low fee broker. The mkt is going up, up on hot air. Mkt makers and specialists are setting the price wherever they feel like at the moment.

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