Essence of Trading: The Three Pillars of Critical Thinking (Part 2)

facts… 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.


Essence of Trading: The Three Pillars of Critical Thinking (Part 1)

Thinking outside the boxCritical 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.


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.


Essence of Trading: Importance of Critical Thinking And Why It Is Not Enough (Part 2)


… continue from Part 1

The Difficulties In Accepting Changes

One of the reasons why many people fail to do something about their bad trading habits is that they cannot feel it. Knowing something is not good for you is one thing. Taking actions to change the situation, however, requires your full acceptance of the knowledge.

Let’s look at a simple situation here.

When you are revealed the truth that a bottle of poison is placed right in front of you, you will not drink from it. You have this strong conviction to refuse to drink that bottle of poison because you know it will kill you. You fully accept the fact that it is bad for you.

Now, as long as the knowledge you acquired in trading does not produce the same assertion or immediate impact to your mind like the bottle of poison does, it is very difficult to enforce yourself to make changes following whatever the knowledge entails.

Many people can be critical of themselves. Some may even to able to tell themselves how bad they have behaved and feel remorseful about that. But only a few have the willingness to completely utilize both the useful and harmful knowledge they identified and then live by the new rules from the understanding of these acquired knowledge.

This quality in a person that separate those who can and those who cannot make the necessary change has many names. Some people call it determination. Some call it moving out of your comfort zone. Some call it willingness to change. The name does not matter. What matters is how you can too learn to stop doing harmful things to yourself and your trading.

Write It Down

There are many methods people use to force themselves to change.

One of the simplest and effective method is to write it down. Not type it out. Just write it down. Somehow, when we write the things in our mind, it will pay more attention to what we have written and enforce the idea back into our head.

For those who are still struggling in trading – dig deep and be critical on yourself. Once you identified the issues you have, write them down. Make yourself face the problems right in front of your eyes. That way you are forced to see it and be reminded that you are hurting yourself if you continue to trade the same way.

If it is a bad habit you documented, then make time everyday to sit down and read what you have written down yourself. Visualize how that can ruin your trading, your career and your life. Do it until you absolutely hate that in your guts.

If it is a better way to trade that you know it is good for you, then do the same rituals but visualize the happiness and satisfaction you can get from following the path. Do this until you feel natural to follow the new rules when you are trading.

You will know when it is no longer necessary to follow the rituals.

End Note

Wrote this piece to honour one of my mentors. He is a self-made millionaire trader who trades Chicago futures. He is like a big brother to me as he is just 10 years older than I am. This technique to correct bad trading habits comes from him.

He likes to keep a journal of his trading and reflects on his weaknesses often. He always said the journal has to be kept secret (private) so that you will feel safe to write whatever you feel is necessary to criticize yourself. I find this to be true and necessary for the journal to be effective.

Long time ago I always took profit too early and cut short my positions pretty fast for no good reasons. It took me better than several months to truly resolve this problem after documenting the issue in my own journal. It must have been several years since I last wrote something in my journal although I keep it at my desk all the time. Maybe one day I will need it again.