I think Victor Niederhoffer best stated the point of today's column in his book The Education of a Speculator.  On the topic of conventional wisdom, Niederhoffer writes "when I hear the words conventional wisdom, I put my hand on my wallet."  While the text is amusing, it's certainly worth understanding why this experienced commodities trader is frightened of what could be categorized as common sense.

The human mind can rationalize a lot of things. Unfortunately, it can also rationalize incorrectly. For example, if you toss a coin ten times, and landed on heads all ten times in a row, what is the likelihood it would land on heads on the eleventh toss? Most "conventional thinkers" would say that eleven heads in a row would be nearly impossible. But "unconventional thinkers" realize that the chance of getting heads on that eleventh toss is exactly 50/50.

Inaccurate conventional wisdom is common in trading. Two of these most common incorrect rationalizations are:

1. What goes up must come down.
2. What goes down must go up.

These axioms seem accurate on paper, don't they? But the reality is that these two statements are false as often as they are true.

What goes up may eventually come down, but if a stock is going up, it's going up for a reason. It may not be a good reason, but there's a reason nonetheless. That's why we typically recommend trading with the trend, rather than against it. That's also why we value technical analysis as highly as fundamental analysis. While a company may have outstanding fundamentals, the stock price is not set by a company's fundamentals - it's set by other investors. As a shareholder, you only make money if share prices increase. So, a "good" company is no guarantee of a good return on your investment. Conversely, shares that "can't go any higher" can and often do go higher, even if the company is losing money. Conventional wisdom says buy good companies, but that's the wisdom that's been drilled into our heads since the day we started investing. Perhaps we should adopt a new conventional wisdom - buy stocks that are increasing in value.

The point is, you have to realize if your trading logic is flawed or not. Conventional wisdom is largely a collection of assumptions. The problem is, these assumptions may have stuck around for years after the events and information that led to those assumptions had changed. Are you basing your logic on what you think to be true, or what you know to be true?

Price Headley is the founder and chief analyst of BigTrends.com.