Stock Market

5 Common Misconceptions about Stock Market

Stock Market

Here is a list of some of the biggest misconceptions that the average trader believes about stock market.

1. There is such thing as a perfect system. I assure you there is no perfect system. You may feel you need to convince yourself that technical analysis, trend following, fundamentals, options hedging, or any other system does not work, but there is always somebody somewhere making a lot of money using those very things. Simply find an approach that fits your personality and develop it.

2. Day trading does not work. Day trading absolutely works. Though I would not recommend it for most traders, those with the time, the resources, and a high level of discipline do very well.

3. You are using the proper time frame in your trading. This is a big one. Generally speaking, most people over trade. If you are having little success with your trading, stop holding stocks for only days or weeks at a time. Consider holding your stocks for several months, or years. Use weekly and monthly charts instead of hourly or daily ones. This saves considerably on commissions and gives your trends time to develop. Is it boring? You better believe it. Is it profitable? Absolutely.

4. Rely on advice from others. If you find yourself looking to others for advice about your positions, then you should not be trading (unless your profitable system was designed specifically around advice from others). You are not confident in what you are doing. If you don’t know the probability of a trade working out, if you don’t know the percentages of trades that make you money, if you don’t know how much money those trades make you, if you don’t know the strengths and weaknesses of your system, if you don’t have a profitable entry or exit strategy, you should not be trading. Stop everything and develop a system. Then test if for free on a trading simulator. Don’t put your real money on a strategy that you are not confident in.

5. You will get rich quickly by trading. While it is absolutely possible to become wealthy very quickly by trading, it is not going to happen for the vast majority. Sit down with pen, paper, and calculator and write out your expected returns. Try to be realistic. If you have $100,000 to start with, and make 20% a year, write out your profits in one year, five years, ten years. Remember to include commissions and capital gains taxes. Unless you seriously plan on becoming a day trader or a money manager, you may not be able to trade for a living.

My advice for those people: Find a legitimate wealth building system that is unrelated to trading in stock market and live off of that. It will free you of your day job and let you concentrate on trading. Plow that extra profit into your trading account. When you get around the million-dollar mark or higher (totally depending on your living expenses and your returns, though, of course), you can seriously consider just trading for a living.

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