Category: Essence

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Essence of Trading: The Three Pillars of Critical Thinking (Part 4)

chalkboard_nomoreexcuses… continue from part 3

"The only thing more expensive than education is ignorance"

– Benjamin Franklin

Self-correction is the most difficult part in critical thinking. We may be very logical in analyzing a situation. We can be very objective in evaluating things. Yet, it is very difficult to apply these two skills onto ourselves. Overcoming this barrier is important in giving us the ability to control our weaknesses in trading and adapt to the ever changing market environment.

Self-correction is a multiple step process. First, we need to identify a potential problem within ourselves. Then, a correction strategy has to be derived. Finally, follow the the strategy to correct our beliefs, or condition our minds to take on the preferred behaviour over the original one.

Obstacles Against Self-Correction

First obstacle to self-criticism is our natural tendency to lie to ourselves. It is in fact a normal behaviour among majority of adults to overestimate their skills and down play their share of mistakes in something that failed to workout. It is an essential psychological make up for human to be more forgiving to themselves so that they would survive the hardship in life. This innate quality makes judging ourselves critically especially difficult.

Second obstacle is our inability to correct existing behaviours. This tendency in human enabled our species better survival chance in the natural environment. It is to our best interest to not question our ability when we are living in the wild. Casting doubts on one self can lead to hesitation. In life or death situations, such hesitations can be the end of our lives.

As in animal kingdom, the necessary skills for survival are all developed in the early age of an animal’s life. Specialized skills like hunting are trained from observation and game play among peers. There is no learning and correction after that once the animal hunters are on their own. The main corrective function is shut off for good after an animal has reached adulthood. Since our bodies including the brains are still mainly a copy of our ancient ancestors, it is no surprise that majority of us have difficulties correcting or changing our behaviour once we reached mid 30s.

Two out of the three steps making up the self-correction process are against our nature. No wonder why there are so many people failed to overcome this obstacle to improve their trading.

Be Honest With Yourself

To solve the first obstacle, you may have to solve an even bigger problem – being honest with yourself.

Since being honest with one self can be very difficult for some and that the only thing we are interested in is to improve our trading only, we can reduce the difficulty by being honest with ourselves in trading only.

Start with something simple. Criticize yourself on things that are obviously bad and difficult to deny. Write them down.

You need to crack your auto defense mechanism first with something minor and then move up the scale slowly. Once you are able to conduct self criticism in a constructive way, you will be able to identify more issues over time. The goal is to allow yourself to see better of what can be done to improve your trading.

There is no point to criticize yourself outside of trading because your interest is not to make yourself into a better person per se. I am not saying that is not a good thing. Just that I am not a "do no evil preacher" either.

For those interested in more about human behaviour in this aspect, you can watch the TED Talk by Dan Ariely, Our buggy moral code. It is a more thorough presentation on how we cheat and being dishonest in general. There are a lot of interesting topics he has touched in the presentation. At the end of the video, Mr. Ariely’s discussion on the difficulty for someone to accept the the opinions from other people when their intuition is contradictory to those opinions strikes home for many aspiring traders.

Kick Start Your Learning / Self-Correction Capability

To solve the obstacle of unable to correct our costly behaviour, there is a simple solution – keep learning new things.

As oppose to focus on just trading, which is the big hurdle you are facing, try doing something else that is simple yet challenging task. It can be a puzzle game. It can be building toy models. It can be learning new ideas and concepts from TED. The feedback from successfully acquiring new knowledge and insights from these tasks will make it easier for you to see the problems hidden within your current trade plan and also improve your willingness to adopt new strategies over the existing one that is not working for you.

It is a trick that triggers your mind to open up a little to different views. By giving it a small reward of satisfaction for adapting and learning new things, your mind is conditioned to be more acceptable to changes on your existing behaviours.

Do not, however, undertake another new challenge that is as complex as trading at the same time. It will defeat the purpose of stimulating your mind for the benefit of improving your trading. Having two daunting tasks instead of one can be very discouraging.

When Nothing Works There Is Always External Help

When you cannot see any problem in yourself or your trading game plan but you are struggling to become profitable, it means that you are not critical enough on yourself. It is probably best to seek for help from someone else. What you need desperately is an honest opinion on you and your strategy.

Due to the fact that the person who is going to help you will have to spend considerable amount of time to understand your situation and your game plan, a trading buddy may not be able to assist you. A coach or adviser with expertise in trading can be very costly and difficult to find as many of them are hired by trading firms to assist their in-house traders. If you do have the resources to hire a reputable coach, it is definitely something you can look into.

Going online and taking your issues to public forums may not be a good idea although you may get lucky at times. The disadvantage of taking your problem to a public trading forum is that people tend to pile on you as oppose to giving you constructive advices. There are also forum trolls who will do anything to seek attention and ruin your thread. If you are lucky, however, you may encounter some nice people who can point you to the right direction or people. Just do not put too much expectation in finding help from this route.

… end of the 4 part series

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Essence Of Trading: Make Trading Worth Your Time

iStock_000013911182XSmallOne thing about being a trader, specifically daytrader, is to accomplish financial freedom with the power of scalability. Once you master a sound trading style, you can scale up easily to improve your profit. The important thing is to realize if there is any specific things you are doing with your trading that delay or stop you from making it happen.

Aim For Efficiency

For example, if you have to grind hours after hours and the average profit per hour is not even comparable to a regular job, you have a problem. Your way to engage the market may not be in your best interest. You need to reflect and understand the reason why you are struggling. Specifically, why are you driving yourself to suffer like someone working on a very stressful and unrewarding job?

If you value your time, eliminate the road blocks one by one using critical thinking to see if you can induce a personal breakthrough. Small progress, no matter how small, will put you on track in becoming a more efficient trader.

Changes Come From Within

What a lot of retail traders do not know is how close they are from their breakthrough moment when they give up. Aside from those who got impatient and risk more than they can afford, what stopped the other ones from improving their trading performance is often the lack of focus. I am not talking about the kind of focus you need in front of your monitors when you are trading. I am talking about the focus necessary in the business development aspect of your trading.

Time has to be scheduled, no matter how hectic your trading is or how exhausted you are. If you are still developing your trading skills, or yet to have a stable method to extract money from the markets you trade, make sure you set aside some time every week. Several hours a week is enough in the beginning. It has to be quality time that you can think clearly. Most of the time it has to be done alone because reflective thinking is difficult to do when there is interference from other people.

Rooms For Improvement

The goal with your quiet time is to think or reflect what is going on with your trading.

Evaluate your situation outside of the cycle of fine-tuning your trading method can often lead you to potential new approach to your trading business. There may be ways to improve your decision making process on how you engage the market. There are also changes to the market behaviour due to issues like policy changes and structural changes which require your awareness so that you are well prepared for their potential impacts.

If you do not sit down and think about these issues, you will be stuck within your existing approach and decline yourself the performance boost you could have.

From this perspective, trading is no different from any other businesses – it needs you to put in your best efforts to grow it bigger. Work smarter, not harder.

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Essence of Trading: Price Goes Up And Down

iStock_000017014380XSmallBefore you spend time even thinking of the more complex price patterns or technical setups, have you even paying any attention to the most basic foundation of the price charts, like the price bars themselves?

It does not matter you use candlesticks or open-high-low-close bars (OHLC bars). The important thing is whether you know anything about your market and timeframe down to the bar to bar relationship. Many would say no. There is nothing to be ashamed of because we are not told to even look at that. Most of the materials you can find on the Internet just skim over the definition of the bars and then immediately move on to talking about the chart patterns, indicators, etc.

It is important to know the basic statistics about these bars you are using. I am not talking about fancy statistics here. Just simple ones that tells you what is more likely. Price movements, down to transaction level, in its simplest form, has 3 possible outcomes. Trade at a higher price, same price or lower price. Price goes up. Price goes down. It cannot get any simpler than this. The important thing here is to know if there exists bias in the simplest price relationships that you can exploit.

Let’s consider a simple coin-flip betting game. If you know for sure that someone is using a loaded coin that favours head over tail (e.g. 70% of the time you get head) when you flip the coin. In almost all normal circumstances, and that your intention is to win money, you would keep betting on head, right?

So if you know that the market you trade, say, on daily basis, has a 70% chance of printing $5 higher as long as it has not dropped $3 yet, would you not keep buying everyday?

Or if you know every Thursday the market you trade has a 65% chance of closing higher, shouldn’t you pay more attention to the possibility of a late day rally that can print a higher close on Thursday?

Every market and timeframe combination has its own special bar to bar statistical behaviour. It is caused by the traders who participate in that market who focus on that specific timeframe. There is nothing magical about that. Assuming these price movements all behave the same way is one of the major contributors to many chartists’ inability to interpret their charts correctly.

Many smart individuals assume that such basic properties of the price bars would be well discussed or mentioned in books if these statistics have any useful bias at all. Since they cannot find such information readily available, they assume the statistics are either not important or not good enough to be utilized profitably. They could be correct for some markets in certain timeframes, but not all markets behave like that. The several free end-of-day swing trading models I published clearly illustrate that there are useful biases hidden in plain sight all along with no publicity whatsoever.

It is not that useful (and simple) biases do not exist.

It is people not trying hard enough to discover them.

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