Blog : 10 Trading Myths (#3 - 6)

by Peter Leeds on January 31st, 2015

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Click Here to See Trading Myths #1 and #2.

Trading Myths #7 - 10 will be released next week.

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Trading Myths #3 - 6

• #3  The Laws Of Physics

What goes up must come down, right?

While this statement may be true in the physical world, it does not apply to the world of investing.

A good high-profile example of this is the Dow Jones Industrial Average, which is now at about 17,164. In the 1930s, it was around 50. It will never see such low levels again. So, while there may be short term fluctuations in stocks and indexes, performance over longer time frames has demonstrated on ongoing trend of price appreciation.

• #4  Sounds Simple To Me

Buy low, sell high. This has become a destructive misconception because most investors misinterpret it to mean accumulate shares that have fallen significantly in price. Whatever the reason for its appeal and widespread popularity, no myth is more pervasive among amateur investors, encouraging them to load up on shares that have recently lost a large portion of their value.

Professional traders and successful investors more often get involved with shares that are on their way up, even if they missed the first 10% or even 30% of the rise. Rarely do they try and scoop up some 'bargain' that recently took a nose dive - troubled stocks always have a way of going even lower.

• #5  I Would Gladly Pay You Tuesday For A Hamburger Today

Oddly enough, some traders think that buying on margin is not highly risky.

Tip: Buying on Margin
Purchasing stocks with money you do not have, but your broker allows based on having a portion of the value of the asset.

This is one of the most dangerous, and potentially damaging methods of trading. Brokers have some pretty 'evil' loan terms and policies. Since your loan is ensured by the value of the stocks you buy with the borrowed money, a drop in the price of the equity suddenly leaves you without enough assets to cover the loan amount.

This is when the trouble starts, as you then need to provide additional cash. Of course, if you had the cash in the first place why would you have needed to trade on margin? So your broker gives you a 'margin call.'  They start selling off some of the stock from your account to cover their own interests, whether or not you had intended to sell the shares then or not.

Tip:  Margin Call
When trading on margin, the value of your portfolio can decrease, causing your broker to start selling some of your holdings to cover the debt you own them.

• #6  Economic Woes

Perhaps you believe that a weak currency indicates a troubled economy.  Generally, the truth is just the opposite.

The less expensive a nation's currency, the more attractive it becomes for foreign investment and businesses to locate there.  This is why we produce almost everything in China, and the biggest corporations now have divisions located in Asia.  China's economy is in great shape, and a big part of that (besides their massive workforce) relates to years of holding the value of the Yuan down to entice foreign investment.

Low currency costs with a large workforce is also why American companies make:

•     automobiles in Mexico
•     baseballs in Costa Rica
•     Monopoly pieces in Ireland
  

I could go on all day... but just look around at the weak job market - you'll see that everything we use isn't actually made here at home.