Trading and Logical Thinking

The truth is: we do not always reach logical conclusions.

The problem is: we always believe our conclusions are based on sound logic.

The result is: we have no incentive to look for a way of improving how we conduct our business or live our lives.

This is costly for traders. Consistently profitable traders don’t have to be concerned with this situation because they are probably making good decisions. It is very much against the odds for a trader to be ‘lucky’ over an extended period of time.

The problem is more serious for traders who earn very little, or who lose, money. The need something better. The very real problem is that it is difficult to convince people that their thinking is flawed and that their decisions are less than logical. It is human nature to believe that we think logically and reach good decisions based on that logic.

We all understand when we require lessons to learn something new. Sports are a perfect example. Individuals take lessons from professionals. Could it be true that people are so willing to accept help in improving their golf (tennis, bowling, baseball etc) skills because there is no logic involved. By that I mean they are willing to accept help in performing better in a physical endeavor than in an intellectual one.

If we cannot play golf well (and I cannot), we can take lessons that teach us to hold and swing the clubs more efficiently. We understand that holding the club correctly involves a decision. We have a bunch of possibilities and we must choose one that works. However, we cannot be expected to know how to hold the club without being shown. When it comes to trading, once we understand the concepts of a strategy, we tend to believe that we manage that strategy effectively. In other words, we believe that we are making good decisions as the trade progresses. If we are not making consistently, then we tend to assume the problem lies anywhere, but never in our personal inability to make good, logical choices.

I can also learn which club to choose for a given shot. Consider how similar this is to choosing an option strategy based on given market conditions. This is a situation in which we are willing to learn form someone else.

I can be taught the importance of follow through. And taking lessons is in no way demeaning. We accept the fact that the professional knows more than we do and willing pay for instruction. The follow through in golf is very similar to knowing when to exit a (winning or losing) trade. yet most traders prefer to go their own way and believe they are always making decent decisions.

However, when logic is concerned, people seldom admit that others are superior. This is not a matter of intelligence. It is merely the ability to sort through alternatives and make a good choice. It is personal. It feels bad when others tell us that we made a poor choice. Yet, we feel no disgrace when we are told me made a poor golf shot.

The Point

If we are not achieving good results as a trader, it may be that our thought processes are flawed. Once we believe we learned how to trade (from experience, reading, seminars, personal lessons, etc.) we believe that we are capable of executing what we are taught. We believe we reach logical conclusions, based on the available facts.

The fact that traders (just as anyone else) can have blind spots and fail to recognize the flaws in their thinking means that there is not going to be an improvement in the results until the the decision-making process is improved. That takes being aware that there may be something wrong with what we are doing, even when we cannot see it for ourselves.

We must be open to the idea that each of us is completely unaware that we believe some things that are just not true.

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