It can be difficult to create a logical strategy for both trading and investing when most of the information sources available on the Internet or in books are effectively contradicting each other.
Can you imagine if your teacher taught you something on Monday, and then taught you the exact opposite thing on Wednesday? You would have trouble applying everything you have learned, because your beliefs would lead you in opposite directions at the same time.
Let me give you a few examples to clarify my point. When buying stocks, there are two popular beliefs: either you buy stocks when they are making new highs, and therefore showing strength, or you buy stocks when they are in a drawdown that you believe to be temporary, and therefore are at a “value price”.
How are you ever going to invest in a stock if you believe in both those principles? The minute a stock is going to be making new highs, you are going to refrain yourself from buying shares because you should be waiting for a drawdown to increase the value of your investment. When said drawdown is going to be happening, you are going to wait until the stock shows strength, and therefore be a solid investment.
Here’s another infamous variable in stock investing: the p/e ratio (price to earnings ratio). The p/e ratio is the ratio of a company’s share price to the company’s earnings per share.
Some people believe that a very high p/e ratio shows signs of an inflated stock price, and that it shouldn’t exceed a specific number to qualify as a good investment (the specific p/e ratio usually varies between sectors). Other people believe that, by disqualifying stocks based on this ratio, you are missing on the home run stocks with incredible growth potential.
To eliminate these contradictions, you are going to need to find sources of information with similar and consistent beliefs. This brings me to my second point.
Find Reliable Sources Of Information
Believing anything you read on the Internet or in books written by authors with no credibility is the most efficient way to become misinformed. You would be better off not reading or educating yourself rather than reading lies or made up theories.
If you think of education as a marathon, misinformation is not the equivalent to slow progress. It is the equivalent to regression.
If you want to move forward in the incredibly complex subjects that are trading and investing, it is imperative that you find a source of information or an author with proven success and credibility, especially if they are trying to teach you a specific strategy. The first thing you should do before buying a book is to not only read its reviews, but to also exercise due diligence on the author.
Positive reviews to a book is not the best indicator of its relevance. You have to keep in mind that about 9 out of 10 traders are losing money to the markets. Why should the positive review of an unprofitable trader on a trading book be of importance to you?
Beware of authors who write about their rise to wealth or their lavish lifestyle without telling you specifically how their money was made. There are stories of authors who invented all of their experience and wealth, only to become best-selling authors and actually becoming rich. This scheme is commonly called “fake it until you make it”. Unless there are public records of what the writer has accomplished, you should tread carefully.
I believe that the most relevant books are written by known figures in the financial world, such as the CEOs of big companies, or by traders who keep their track record public.