By: Chris Rowe — October 13, 2020
The Best Trading Advice You'll Ever Receive
If all the drama surrounding the upcoming election is making you feel jittery...
You're not alone.
Uncertainty always makes people nervous.
In fact, I've been hearing one particular question a lot lately: “How do I know when it’s the right time to be in or out of the market?”
The short answer is this: If you’re asking that question, it’s time to stay out.
After all, the most successful stock market investors aren’t always invested in stocks. They’re only invested when the odds weigh heavily in their favor.
A common mistake I see all the time is that a new trader will learn the “magic” of one particular indicator... and then get so excited that he or she runs out and uses that one single indicator to time all trades.
Inevitably, an expensive lesson is eventually learned. Don’t make that expensive mistake.
Cash Is a Trade, Too
If you don’t feel that you have overwhelming odds of success, then don’t get involved. Think about it: If you're sitting on cash instead of stock while the stock market moves 8% lower, then you’ve just beaten the market by 8%!
That said, you must have the discipline to know when to stay out.
For most people, this is one of the easiest concepts to grasp, yet the hardest to follow. It's something that comes with experience. And it’s something most people have to re-learn several times throughout their investment life.
To further stress my point...
When I started in the business, I witnessed 10, 20, 50-year Wall Street veterans re-learning this lesson (and admitting it to me).
The stock market has a way of sucking the ego right out of any soul, no matter how big the head is, or was. Imagine an egotistical – understandably so – 65-year-old, successful fund manager admitting this to an 18-year-old kid.
I’m going to give you a piece of advice right now that might surprise you. And it might not sound like it, but it’s going to be some of the best advice that you’ll ever get about stock trading.
Find an account or stable investment vehicle that offers you a nice interest rate. You can look at Treasuries, Certificates of Deposit (that’s right, a Wall Street trader recommending CDs), a high-yielding money market account, or a bank or broker that’s offering a relatively high-yielding interest rate.
If, after nine months of waiting in a money market account, you invest at the right time for a three-month portfolio increase of 20%, you’re probably beating the market’s return.
There will be plenty of times when you don’t find trades where you can honestly say to yourself that you feel the odds are heavily stacked in your favor.
If you always have “good trades/investments,” then you aren’t screening hard enough. I would estimate that 99% of individual investors don’t spend enough time on the sidelines. Keep your standards high, and be willing to sit on the sidelines for as long as you have to.
Savvy investors are willing to sit in a risk-free, interest-bearing account for years if they have to.
And you should get comfortable with taking the same stance.
What’s likely tied for first place on the individual investor’s list of most common mistakes is the notion that if you’re not in the market, you’re not making money.
Anxious and over-eager investors force trades at the wrong time, mainly because they’re afraid of missing the next big gain.
Here's a typical scenario...
After taking a 30% loss on the first trade, they find a trade that actually does make a lot of sense, and they make 50% on it.
The problem is, that’s a net gain of only 5%.
Here's the math: Say you invest $1,000. A 30% loss brings your account down to $700. If you invest that $700 into a trade that returns you 50%... you make a $350 profit. $700 + $350 = $1,050.
That's a 5% return.
So write it down and memorize it: Cash is a trade!
While sitting in cash, you'll get to enjoy the most valuable commodity -- "time".
Use that time to make yourself a stronger investor.