Tag: Day Trading

Critical thinking is a concept that we learn partially throughout basic education. For some who eventually enter graduate studies, it suddenly becomes a requirement. It is as if the concept does not require learning at all. I find this very odd indeed as critical thinking is not something that comes naturally like our animal instinct or superstition.

In my own words, critical thinking is the process of objective evaluation of knowledge acquired and acceptance of such knowledge with clear understanding of the reasons behind.

Critical Thinking As The Guardian Of Your Trading Knowledge

Why is critical thinking important in trading then?

It is the tool needed to weed out the knowledge that are deemed harmful to your bottom line.

Not every trading method will suit your need. Your character and your understanding of the markets will pretty much determine what trading style you will accept. That is not necessary the optimal way to deal with a particular market. That is not even the best way to grow your trading account. But you cannot change your trading style until your view of the market allows you to do so.

By analyzing your own actions and trading results, you will be able to find out objectively how you failed to take advantage of the opportunities presented by the market. As long as you can be critical on yourself, you will be able to see all the wrongs in your own trading. By thinking hard and reflect on the issues, you can isolate the bad habits from the good ones.

At this point you have all the answers you need to improve your trading.

Just Having Critical Thinking Is Not Enough

Now the bummer – as long as you do not act upon the knowledge you have acquired from criticizing your own trading performance, you have wasted your time. Most important of all, which I find most people failed at, is the incorporation of their new found understanding of what works in the markets into their normal decision making process.

Trading is not the same as doing pure scientific research or giving criticism only (e.g. movie critics) that utilize critical thinking but do not require your integration of the results from your critical thinking into yourself. In fact, trading is one of the few careers I know of that you have to live by what you believe or you will not be able to trade properly.

Here is an example illustrating what I am talking about.

Many front line medical workers who work in the hospitals learn from first hand experiences how smoking can be extremely damaging to a person’s body. They would advice everyone to quit smoking and never start smoking. Yet, many of these medical workers who are already smoking never stop smoking themselves.

They know intellectually that smoking is bad and their minds clearly gone through the process of understanding how smoking is bad for them. Yet, they do not translate the understanding into their normal decision making process. In this case, quit smoking should be a no-brainer yet we see many of them continue to smoke right outside of the hospitals all the time. Smoking, however, does not affect their work directly at all.

Now, think of having the bad habit of averaging down on your losing trades. Well, you know it is bad and you do not do it all the time. You just do it occasionally, like, when the situation gets very bad against you. Every time you did it and got burnt you probably would swear that you would never do that again, yet you do it again. This behaviour is enough to finish your trading career off easily – all it takes is one bad trade which may very well be the next one.

There are many other forms of bad habits in trading. Unlike most other career choices, your inability to incorporate what you know about these bad habits into what you do actually hurts your performance in trading. To take your trading performance to the next level, you must find a way to deal with this obstacle.

will continue in part 2 …

We were told, by traders before us, that trading is difficult – difficult to learn, difficult to turn a profit, and difficult to master. Their words, together with almost every book out there written on the subject, have painted a very grime picture for anyone who wants to learn trading and profit from the financial markets. We have to wonder how difficult can that be and what really makes it so difficult for many people to trade successfully.

I will address these areas one by one.

Alchemy vs. Science

Why trading is difficult to learn? Physical science has not been developed on the subject of price discovery yet. Well, at least I have not heard of any large scale attempt published yet.

The alchemy reference I made in Essence of Trading: Modern Financial Economics Is Just Alchemy In Disguise painted a good picture of what happens in the financial markets over the past 100 years. In fact, there is no extensive study of price movements in academia at all until recently. For some reason, if you did, you would be damned by your peers. It is like Galileo suggested that the Earth rotates around the Sun. It was a crime. Maybe it is the nature human – those who have something to lose would do anything to stop others rocking their boat.

Due to the non-scientific nature of trading techniques that are published (or exposed), they are not something a group of people can simply follow the instructions and then expect to obtain similar results across all these people. Some people will do better in comparison to their peers and some will do worse. Hence, feedbacks from traders using the known trading techniques seldom produce convincing validation on these methods.

It is human nature wanting to be in control when dealing with uncertainties. Trading is the ultimate challenge in human activities to accept uncertainties and extract profits under such conditions. That’s why many traders made the mistake of seeking explanations or using vague big picture view / theory to anchor their minds. At the end, such comfort to the minds not only hurt their bottom lines but also send these individuals to a wild goose chase on the next best explanation.

All existing trading methods have their weaknesses. There are times that they do not work. Accepting that will eventually take you to the next level of trading.

Personal Growth Takes Time

Why is it difficult to turn a profit? I don’t think it is difficult at all. The real problem is that It is just too easy to lose it back to the market.

Given a sound trading model (like the examples I posted), using conservative money management, it is just a matter of time to grow your capital to the point where it is big enough to replace your regular income. Yet, I always receive emails from readers that they want something that makes more money. They want instant gratification. They want to do what I do in daytrading, now.

I told them that they cannot. First, they need the appropriate capital size. Second, their minds have to be ready to handle the equity swings. Both take time to grow.

I discuss about the drawdown effects on a person in Know Your Odds Before You Trade, so I will not repeat that here. However, there is a different aspect in capital management that worth talking about here. Traders often increase their size per trade too quickly and that in turn messing up their minds. Even though they are going through the same cycle of winning and losing but at a magnified impact from the equity swings, these traders can no longer consistently making the correct decisions.

Many people use all sorts of techniques to avoid facing the equity swings issue so that they can keep themselves in peak performance, as if they are trading just a small size position all the time. For example, they choose to hide their account balances, net profit (or losses) from the screen during trading hours.

The reality is that the longer you delay the effect, the worse it will hit you. It is better to learn to deal with the equity swings and grow your mind to handle it. If you are trading bigger size by hiding the real equity impact from yourself, one day your mind will suddenly catch up on the reality and paralyze your trading and performance.

At The End It Is Just Buy And Sell

Why is trading difficult to master? This part is very much a Zen question so I will quote you the Zen answer here.

"Before I was enlightened, a mountain was just a mountain. When I was enlightened, a mountain wasn’t a mountain anymore. After I was enlightened, a mountain’s just a mountain again."

In the beginning you probably read everything, tried everything and blew a few accounts.

More ups and downs along the way, suddenly you think you figured out something where your trading breakthrough happened. For some, that would be the start of a profitable trading career. For others, they fell back to more ups and downs awaiting the next breakthrough.

What really separate the two groups is that those who are on their way to successful trading drawn the line – accepting what they know that works and use only things they know that works.

From that point onward, it is the personal growth that dictates what they can extract from the markets.

There is no one single best trading style or method, but there is likely a best trading method for a particular trader for the particular situation he/she is in. Knowing what is best for you in your own circumstances makes you a master in trading.

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