Some investors and trades believe that you should never hold on to a losing stock, and equally that you should hold on to winning stocks for as long as possible. This is just one tip among the many myths or half-myths about stock trading, but let’s see some of the most common ones and why they are wrong or half wrong:
Never let a profit turn into a loss! This is almost completely nonsense, there are cases where traders need apply this rule, but for most investors, and longer term traders there’s no reason to close every trade that shows some loss, after all, all stock trading positions start out as losing trades! Warren Buffet and George Soros do nothing but hold onto long term investments, and most of the time they are in the red!
Always place your stop loss order below yesterday’s low! This is by far the most ridiculous tip ever, if you watch the markets closely and long enough, you will notice that most of the time yesterday’s low is breached with momentum, then once breached and having intimidated most traders, the market stalls, reverses and finally rallies all the way until the closing bell!
It takes years of practice to become a good stock trader! Yes, it does, but not necessarily 15 or 20 years, if one is well trained they can become a good trader in just 3 years, just as long as they trade through volatile market conditions and period of extreme adversity.
Technical analysis can accurately predict stocks! Big myth, no one really can predict accurately 100% of the time, and no methodology, human or computerized has officially shown more than 80% consistent accuracy. Even investors who made millions in the market through stock trading, have less than 60% accuracy in their predictions.
You need to change in order to become a better trader! While I partially subscribe to this idea, some bad habits we have can be stopped indeed, but our character can never change, rather you are better off finding a stock trading methodology that matches your personality as is. Generally, most people would not make great investors and stock traders because of their inability to assess probabilities and get over their human emotions, it is very human to be wrong most of the time and make many mistakes. But people who become good traders have an inner curiosity and desire for success, one that starts at an early age, usually in their teenage years. On the other hand, the losers are usually laid back people doing all sorts of easy jobs, they were relaxed in their early life, no curiosity, and they will remain as such for the rest of their lives, they cannot possibly change. The curious type of teenagers want to be investors, engineers or want to somehow change something in this world, they go through severe failures, ups and downs in their life and are keen to change again to make their dreams come true. The lazy teenagers or the other hand just want job security, they would be happy to work in the army or in a fixed state job, where they are robbed of their creativity and they must not even want to change anything around them. The bottom line is that neither the curious, worrying type of people, nor the lazy, laid back type can ever really change, but the curious ones can adapt to the requirements of an investing or stock trading methodology.
Finally there are some myths about long term value in the stock market, most people think that the stock market always goes up in the long run… but does it really? It’s more likely that indices go up and not necessarily individual stocks, a stock can decline and finally get de-listed off the exchange and be replaced by a new one. The stock index will sure go up through the years but without that failed stock. And then there’s inflation, if inflation is 5% per year, and your stock investment yields 3% then you are actually losing money even though the stock keeps going higher. For long term investing in particular, you cannot say you have actually made money unless you have achieved a 7% or higher annual return, because for most of us real life inflation stands at 7% per year!