Tag: Day Trading

… continue from part 1

“Real knowledge is to know the extent of one’s ignorance”
– Confucious

Objective Evaluation Is Difficult

To observe and collect evidence from something physical is quite different from doing the same on abstract data. Physical evidence like a kid who got a black eye after school is easy to identify that his eye was hurt and it is not a usual school day. Further investigation into the matter will tell you more, whether the kid has hurt himself in an accident or from a fight. Once we have the facts on hand, it is easy to make better judgement after understanding what really happened in the situation.

A market moving higher (or lower) has no visual indication whether it is rising too far too fast (or dropping too quick too deep). It is up to the person who is tracking the market to identify the condition alone. That makes it very difficult to even get to the point with the facts straighten out as we do not have a scientific framework to start with. Do not get me started on how bad classic economic theories are from this pseudo science that tainted the name of science for centuries.

All Boils Down To The Study Of Price

To put the market condition in context, majority of people tend to guess and valuate the situation with superficial personal imagination, borrowed experience from other life experience, reading from trading books in a rush, and worse of all accepting mainstream media reporting. All these actions lead to bad observations as the classification or explanation obtained from these means are not scientific nor reasonable. Accepting these observations as your own is no difference from telling yourself you are standing on the ground now so it must be alright to leap forward where in reality you are standing at the edge of a cliff where you will face sure death should you jump forward.

In short, a framework of price behaviour has to be ingrained into yourself first so that it is possible to allow you to grow your knowledge of the markets internally to the point that you can proficiently observe and make dispassionate judgement of the current market conditions without being interfered by others. Due to the fact that there is no evidence from the past on how the markets behaved outside of their historical price data (with bits and pieces of news event schedules), it is obvious that the first viable solution is to study the historical data.

Hence, the study of price behaviour, or chart reading, is the only logical path to follow.

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Critical thinking is not just thinking hard or deep into an issue and then decide whether to believe it or not. It is a common misunderstanding that everyone can just do that at will if they try. Most of us has to be trained to have the necessary critical thinking skills to make it functional. I am going to explain what is needed to achieve the goal of developing good critical thinking skills specifically for the purpose of improving your ability to trade.

Critical thinking can be loosely build on three core disciplines. They are Logic, Objective Evaluation, Self-Correction. All three disciplines are related to each other and have overlapping components. Hence making the subject of critical thinking difficult to explain in general.

Logic

We often talk about logical thinking as if it is something separated from our normal self. It is a skill many of us are exposed to when learning mathematics and science subjects in school but logic by itself surprisingly is not a required subject. We are trained to use logical thinking to solve academic problems but seldom do we apply such on everyday life situations. In fact, many of us have chosen to think logically only when we are dealing with abstract problems, puzzles, or games.

Personally I think logic (and statistics) should be taught as soon as kids have a basic knowledge in math. But what do I know? A class of logical thinking students is a class of students who will likely challenge their teachers all the time with tough questions. I am not sure if our education system like to see that happening.

Usual symptoms of handling problems illogically:

• thinking in circles that keep sending you back to the original problem again
• staring at the problem in front of you while you think you are thinking of a solution but in fact your mind is blank
• keep trying variations of a solution to a problem without questioning the validity of the approach itself when the solutions you tried are all falling apart

Specific to trading, logic is often used in combination with statistics. In fact there is this specialized branch of mathematics dealing with probabilistic logic but the academic mumbo jumbo is totally overrated for practical trading purpose (most of the time).

What I like to mention here is that using simply logic to apply onto a trading problem (e.g. a sell setup) that is probabilistic in nature can lead to all kinds of wrong answers. The most famous one being efficient-market hypothesis. This particular issue deserves further discussion. Maybe in another article in the future.

If you found that when you are thinking of ways to deal with the markets and you keep suffering from the problems listed above. You need to learn logical reasoning properly. You don’t have to study a college course on logic and stuff. All you need is to brush up your reasoning skills with a few books on the subject so that you can think smartly instead of wasting time on a bad idea or having your mind stuck in places that causes frustration.

I reviewed two books on reasoning skills that are good introduction for anyone to read – The Thinking Toolbox: Thirty-five Lessons That Will Build Your Reasoning Skills and The Fallacy Detective: Thirty-Eight Lessons on How to Recognize Bad Reasoning.

The main goal of having good logical thinking skill is to allow yourself to see what is more reasonable, even though you do not believe so.

The secondary goal is to be able to see what is unreasonable or illogical, even though you strongly believe so.

Logical thinking is a skill not just useful in developing your trading ability, it is also a life skill that will benefit you tremendously with just a little effort in acquiring the techniques.

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