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


Essence of Trading: The Three Pillars of Critical Thinking (Part 3)


… continue from part 2

"Being ignorant is not so much a shame, as being unwilling to learn"

– Benjamin Franklin

Stop Associating Common Terms With Market Conditions Until You Can Understand What They Really Mean

The first most common mistake I have seen is that someone telling everybody that a stock (or whatever that thing is) is very cheap to buy and will go much higher. Yet, the word cheap is not defined clearly in the statement, nor the projection of going much higher is defined. The words cheap and  going much higher is used casually without substance. At best they are just comforting sound bites.

Further investigations into this kind of claims usually result in the discovery that the person has already bought the stock. Digging deeper you will find out there is no proper money management (What? What is stop loss? Cheaper the better and I will buy more!) This risk of losing all the money throw at the stock may not be acceptable to that person but the possibility is never part of the consideration in the first place when the stock was bought.

Trading is not gambling if you choose wisely. If you like buying "cheap" stocks, figure out exactly what conditions are necessary to make a stock "cheap", something that will give you positive expectancies should you bet on that consistently. I use the word bet very carefully here. Bet in this context means you are not sure if the outcome will be in your favour but you know that because the exact conditions are met, you are likely going to make money off the bet. In another words, it is not gambling. You are similar to those people who count cards and (in the words of the casinos) loot the casinos consistently.

The big difference here is that casinos can ban you from placing your bets with them (usually after you extracted significant amount of money from their operations) while the regulated financial markets around the world cannot (most of the time).

Like Learning A New Language

Learn to stop speaking jargons to yourself until you have acceptable meanings for them. It is the very first step you can transform yourself to become more objective in evaluating the market conditions you are facing. Every time you find that you do not have an exact meaning to a term you use to describe the market, you have homework to do – write it down and investigate. All these accepted terminology without clear definition in your mind is an obstacle to your ability in handling the market you want to make money from.

This process of relearning the language you use on the markets is not easy. It is also not straightforward as you are filling in the gaps of your understanding of the markets, you will keep finding more holes in your knowledge of trading. It is normal that you feel overwhelmed in the beginning.

Remember that it is alright to not understand something because there may be nothing important to understand.

During your quest for clarification of your knowledge, some terms is simpler to learn because they are just definitions you have not heard of while some other ones will require your use of logic and statistic inference to define the concepts. It is the same as learning a foreign language. As your set of clarified concepts keep growing, you will be able to define and understand the more difficult ideas over time.

Clarity Comes From Rigorous Study

Some people will simply give up the approach as they could not do it without feeling uncomfortable. It is as if they are strip naked. It is exposing yourself to your own ignorant side. There is no need to resent this. Everyone have something they do not understand. No one is an expert in everything. Trading is very likely not your domain of knowledge or expertise because there is no such training from standardized education. There is no shame to accept this fact.

During this discovery (knowledge acquisition) period of the vague concepts in your mind, there are two common techniques to achieve the goal – direct and indirect approach to learning.

You can focus on using statistics on historical data and events to guide you. The collection of statistics and analysis through the lens of  statistical method is an indirect learning experience, meaning that it requires acceptance of statistics as your ultimate decision making tool which is often difficult to do.

Knowing the subject of statistical analysis well has nothing to do with the ability to use it as a tool to acquire new knowledge. That is the reason why we see a lot of programmers and engineers who try their hands on trading and writing all these codes to study the markets, failed miserably in trading. They are just not the type of people who can accept new knowledge from indirect learning experience.

Personally I cannot solely rely on statistics results either. I always confirm the findings from both visual inspection of the new biases I obtained and also tracking them in real-time until I am comfortable to integrate them into my trading.

Direct learning experience means using hands on approach to learn new things. If it works better for you in the past, or it is how you learned your best skills, it is likely the better choice for you. For the purpose of trading, it translates into learning by rigorous visual inspection. First, you print out your charts, mark them with the important events, price patterns, etc. and then examine the charts or raw data closely. Bar by bar, one chart after another, you will start to feel natural with your interpretation of the information for each specific concept you have doubts about.

The clarification achieved through direct learning often cannot be quantified or explained exactly in words. You are just trained. It is very similar to our experience in learning to ride a bicycle or drive a car. We cannot explain how to do what we do exactly but we can do it.

There is no good or bad method to clarify your understanding of price actions in markets. Both methods I described above get the job done. Several of my mentors who highly specialized in specific trading methods (first techniques popped into my mind – point and figure, channel drawing) learned their chart reading methods the direct way. They have every single trading day of the markets they trade printed out with all kinds of notes, marking, etc. on their charts. When you treat trading seriously and understand your learning of chart reading is an important step towards your success in trading, you would do the same.

Notes: The discussion on Objective Evaluation went a bit longer than I expected as I have to cover various topics related to the mechanisms of learning. Hopefully I have explained the concepts clearly.

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.