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

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 …

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