I have been investing and working in the financial services industry for over two decades. Over thousands of hours of studying and observing markets, I have learned many lessons that were not immediately apparent when I started. In fact, I have the battle scars to prove it. Unfortunately, most investors must learn these lessons through what I call “the School of Hard Knocks.” That is, learning by fire, losing money along the way, and either eventually maturing as an investor or giving up.

Debunking Common Trading Myths

After all these years, I still find myself making mistakes in the market. Wall Street is an imperfect business, and the learning never ends. Though it is impossible to avoid errors, I have learned that if investors can mitigate mistakes, they can be consistently profitable over time and benefit from the great growth story known as the U.S. equities market. To help speed up your learning curve, here are 10 of the biggest myths that amateur investors fall pray to on Wall Street, including:

1. Macroeconomics and Earnings are the Main Market Drivers

As we approach the U.S. presidential election, you will likely hear from each candidate that “If (the other one) wins, the stock market economy will sour and the stock market will crash.” Meanwhile, if investors turn on financial television, they are likely to see an analyst in a bow tie calling for the next great financial crisis.

History teaches us that stocks tend to rise in the long term regardless of who is in office. Presidential candidates often use fear tactics to gain votes, and this strategy often works. On financial television, analysts get more airtime and hype for being bearish. However, the truth is that the market is driven by liquidity, specifically driven by the Federal Reserve board.

“Earnings don’t move the overall market; it’s the Federal Reserve board. Focus on the central banks, and focus on the movement of liquidity. Most people in the market are looking for earnings and conventional measures. It’s liquidity that moves markets.” ~ Stanley Druckenmiller

2. Technical Analysis is a Short-Term Endeavor

When new investors think about technical analysis, or the study of price action, they often misconstrue it as a short-term endeavor. However, long-term technical analysis is the most powerful method of using price action because it blocks out the short-term noise and volatility to provide investors with a high-level view of the predominant trend. Below is a monthly chart of market leader Apple ((AAPL Quick QuoteAAPL - Free Report) ) versus its long-term moving average.

Image Source: Zacks Investment Research

3. Valuations are a Timing Device

Valuations are not a timing device; they are a secondary indicator. In other words, investors should not use valuations in a vacuum. Instead, the best way to use valuations is to watch them in conjunction with the overall backdrop. In bull markets, investors are willing to pay a premium for growth as they look to be in the fastest horses. Conversely, in bear markets, high-valuation stocks get hit the hardest as investors flock to value stocks for safety. Nvidia ((NVDA Quick QuoteNVDA - Free Report) ) is a prime example. The stock was crushed in the 2022 bear market and has outperformed in the current bull market environment.

Image Source: Zacks Investment Research

4. Buy Low, Sell High

I have learned that bottom fishing can be a very expensive habit on Wall Street. Instead, investors are much better off latching onto an existing trend and riding it higher. Remember, “The trend is your friend.”

5. Markets Discount the Present

One of the most important lessons I have learned throughout my career is that markets are forward-looking and discount the future. For example, the Nasdaq 100 ETF ((QQQ Quick QuoteQQQ - Free Report) ) and the S&P 500 Index ETF ((SPY Quick QuoteSPY - Free Report) ) bottomed in October the day 40-year highs in inflation were announced. Stocks often bottom on poor news and top on rosy news.

6. Stock Selection is the Most Important Ingredient to Success

Far too many new investors obsess over which stock to buy. Instead, these newer investors should spend more time studying themselves (risk management, psychology, execution).

7. You Have to Be Right on Most Trades to Be Profitable

Home run hitters that manage their risk tend to win on Wall Street in the long run. If an investor shoots for a 5-to-1 reward-to-risk ratio, they can be wrong on 80% of their trades and still break even. In fact, with this ratio, an investor can make a killing by only being right 40% of the time.

8. Bubbles are Bad

The word “bubble” has a negative connotation in many Wall Street circles. However, savvy investors understand that the word bubble simply means stocks are moving higher rapidly. Furthermore, when a bubble is ready to burst, many warning signals, such as climax tops, flash. Investors should study past bubbles to learn to take advantage of them instead of fearing them.

9. Investigate, then Invest

Legendary investor George Soros says he does the exact opposite, “Invest, then investigate.” Rather than wasting precious time understanding every nook and cranny of a business, invest a small amount and build up your position. If you successfully gain a cushion in the stock, you can investigate the story further to build conviction in your position.

10. There’s Always a Bull Market Somewhere

Seventy-five percent of stocks follow the general market’s direction. While it can be tempting to try to find the rare stock that bucks the market trend, it’s best for most investors to find and understand a market timing procedure.

Bottom Line

Textbooks and real-world investing are two completely different endeavors. Understanding these common trading myths will save you time, energy, and stress.