Trading psychology is often considered the cornerstone of successful trading and investing. This belief stems from the understanding that all decisions in the market originate from the mind’s complex decision-making processes. However, a key aspect that is frequently overlooked is the trader’s grasp of epistemology – the study of knowledge and truth. Specifically, many traders struggle with differentiating between various kinds of ‘truths’ that influence their decisions. The common perception often boils down to a binary classification: ‘Fact’ or ‘Opinion’. However, the reality of knowledge and truth, especially in the dynamic world of trading, is far more nuanced.
To illustrate the complexity and diversity of truths in the realm of trading and investing, let’s consider the simple, yet relatable analogy of choosing between chocolate and strawberry ice cream. This everyday decision mirrors the complexity of market choices, where different types of truths play a crucial role. Below is a table that categorises these truths, providing examples from both the world of ice cream and financial markets, to highlight how each type of truth manifests in these contexts.
| Type of Truth | Ice Cream Example | Market Example |
|---|---|---|
| Objective Truth (Unbiased, verifiable fact) |
The freezing point of ice cream is below 0°C. | The stock market closes at a specific time each day. |
| Subjective Truth (Personal perspective, not universally provable) |
Chocolate ice cream tastes better than strawberry. | Technical analysis is superior to fundamental analysis. |
| Relative/Contextual Truth (Valid within a specific context) |
Ice cream is a popular food (in summer). | Following the trend is easier than going against it (in trending markets). |
| Absolute Truth (Universally true & unchanging) |
Both chocolate & strawberry ice cream exist. | Each major country has its own stock market. |
| Empirical Truth (Supported by data & evidence) |
Chocolate ice cream is more popular than strawberry. | XYZ stock has delivered growth during certain years. |
| Normative Truth (Morally or ethically accepted) |
One should always have the choice between chocolate & strawberry ice cream. | One should always have the choice to buy or sell. |
| Definitional Truth (Based on accepted definitions) |
Chocolate ice cream is chocolate-flavoured. | Diversification spreads risk. |
How You Can Benefit from Understanding Different Truths
Recognising such truths is crucial for making informed, rational decisions. This understanding not only guides traders and investors towards more successful strategies but also helps in developing a disciplined approach to market analysis. Practising this skill involves constantly questioning the nature of information, assessing market scenarios through various lenses, and being adaptable to the changing dynamics of financial markets. Ultimately, the ability to discern and apply these different types of truths can lead to more effective and profitable trading and investing decisions.