Trading Concept Guide (Part 10): The Deadly Thinking Blind Spot – Causal Fallacy

The Trading Concept Series aims to share some “rarely discussed but extremely important” trading concepts. I believe that both beginners and experienced traders can take away valuable insights from these articles. There are a total of 10 articles in this series, and this is the 10th installment. (Background recap: Trading Concept Series (IX): How many times should you leverage? Should you use full margin or isolated margin?) (Additional context: Using Bitcoin’s 2021 double-top pattern as an example: discussing what “future data leaks” mean.)

Basic Logic

Logic is a concept I’ve emphasized repeatedly since I started operating Mr. Bag. Because there are countless theories and schools of thought in the financial markets, and our compulsory education didn’t include systematic financial courses, newcomers to the market often waste a lot of time learning useless or unproven theories if they don’t pre-filter what’s truly useful and reliable.

Since beginners usually lack the ability to distinguish useful information from junk, I personally believe the best way to evaluate is to “maintain skepticism and verify with logic.” For example, if someone tells you the following (just an example, not necessarily correct), always question and ask for the “reasoning behind it”:

• Weekly MACD bullish crossover = bullish signal: “Why?”
• EMA 21 provides support: “Why?”
• RSI divergence indicates a bullish reversal: “Why?”
• Falling wedge pattern breaks downward: “Why?”

If you can’t come up with convincing reasons, then don’t adopt that idea. Ultimately, you’re risking your own hard-earned money in the market—are you really willing to rely on theories you don’t understand?

A Word on Common Fallacies

Those who tell you that EMA(21) or EMA(xx) has support effects might not even know how EMA is calculated; those claiming MACD bullish cross equals bullishness might not understand the origin of the default parameters (12, 26, 9).

Gambler’s Fallacy and Anchoring Effect

A classic question:
“If a fair coin lands heads 35 times in a row, I want to bet on tails on the 36th flip because the probability of 36 consecutive heads is extremely low.”
This is the gambler’s fallacy.
Indeed, the probability of 36 consecutive heads is 1 / 2^36, which is very low. But each coin flip is an “independent event,” so the probability of heads on the 36th flip remains 50%.
If you base your bet on the above reasoning, you don’t understand probability or math.

Another common fallacy is the anchoring effect:

• “It’s already risen so much, I dare not buy.”
• “It’s fallen so much, I can buy now.”

Remember:

• “It’s risen so much” is not a reason it can’t go higher.
• “It’s fallen so much” is not a reason it can’t fall further.

Your buy or sell decision should depend solely on whether the price will continue to rise or fall afterward.

Think about this:
Suppose someone saw Bitcoin at $1 and then watched it rise to $100, a 100x increase. Is “already up 100 times” a reason to prevent Bitcoin from rising further?
Obviously not, because Bitcoin’s current price is in the six-figure range.
This is a typical causal fallacy or misattribution.

More Simple Logic Examples:

• The sky is raining → the ground is wet;
  but the ground being wet doesn’t necessarily mean it rained.
• All deceased people have drunk water;
  but drinking water isn’t necessarily the cause of death.

There are countless such examples—think about them carefully.

Is It the Holy Grail or Just Good Luck?

Often, you might see claims like:

• “Historically, Bitcoin tends to rise in month n.”
• “Because Bitcoin has risen every New Year, it will rise this year too.”
• “Altcoin season is coming.”
• “Because Bitcoin always hits the xx-day moving average precisely, that line is very useful.”

These kinds of content attract the most traffic but also cause many to lose money.
While careful observation can reveal certain “patterns,” discovering these doesn’t mean you’ve found the “Holy Grail.” In fact, believing these patterns are the “Holy Grail” can be deadly.

If you find a market pattern or see one elsewhere, always remember to pause and verify using these two principles:

1. Is the sample size large enough?
2. What is the underlying logic?

If someone claims a pattern but has fewer than 10 samples, it’s likely just luck.
For example, someone says:
“If you lift your left foot, wear a floral shirt, and flip a coin with your right thumb, it will definitely land heads.”
And then shows a video where they did this and got 10 heads in a row.
Would you believe it?
Of course not.
A fair coin has a 50/50 chance for heads or tails.
Getting 10 heads in a row might just be a 1/1024 chance, and they’re just bragging about luck.

So, theories with small sample sizes and no reasoning should be considered garbage.

You might think this example is silly or funny. But consider this alternative:
“MACD bullish crossover + RSI oversold + … indicates bullishness, so go long.”
It’s not that signals like MACD or RSI are necessarily wrong, but before accepting these theories, ask yourself:
“Do these signals have a direct correlation with the actual price movement?”

Summary

This series aims to help newcomers develop correct, scientific, and rational thinking.
In the internet age, information overload means there’s a lot of junk out there.
Without logical, deductive reasoning to filter sources, you risk wasting time and taking wrong turns.

Sadly, many people who don’t understand finance or trading will spread baseless concepts as if they’re truths. If they happen to be right, they might claim, “See? I told you so,” to elevate themselves.
Many retail traders fall for this, unaware that it might just be luck, and the price movement has nothing to do with the initial reasoning.

Just like the example of flipping a coin with a strange method, such stories are everywhere.

In conclusion, this Trading Concept Series wraps up here. I’ve written ten articles, with topics chosen spontaneously—what came to mind. But the core focus is on content you rarely see elsewhere, yet is extremely important.

I hope these articles are helpful to you. Thank you for reading.