Lawrence – Page 76 – Essence of Trading

November 10, 2012May 17, 2017

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.

November 8, 2012July 25, 2017

The Fallacy Detective: Thirty-Eight Lessons on How to Recognize Bad Reasoning by Nathaniel Bluedorn, etc.

Summary

A great introduction to reasoning with logic and how to detect lies that are told in various situations. Good book for anyone who has no formal training in logic and those who want to build up their critical thinking skills. Highly recommended.

Book Information

The Fallacy Detective: Thirty-Eight Lessons on How to Recognize Bad Reasoning
Written by Nathaniel Bluedorn, Hans Bluedorn

Rating

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Continue reading “The Fallacy Detective: Thirty-Eight Lessons on How to Recognize Bad Reasoning by Nathaniel Bluedorn, etc.”

November 8, 2012May 17, 2017

Essence of Trading: Importance of Critical Thinking And Why It Is Not Enough (Part 1)

Little pretty child 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 …