Tag: daytrading

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.

[DTBpromo]

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 …