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Can you describe how each step builds on the previous one?
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it makes sense what was mentioned in the teaching that without proper observation, we will not be able to interpret the passage accurately and if that occurs, how can we apply it to our life?
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The Bible is your instruction manual. How do I do that? First I have to look , observe what it says. Read carefully, observe the details, the context. Then , when I observe the scene, I have to wonder what it all means. There is the historical context, customs, timeframe, people involved, places. Look carefully at the dialogues. And from all that, I can ask myself : what does it mean for me today? What is God telling me?
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I learn and then apply
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Observe well, interpret accurately, do what God intends
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Obviously you must first observe in order to be able to interpret or apply something it must have been read first. Next interpretation comes from studying what you have read so that you can apply it to your life. Application only comes after you have found out the true meaning and discovered a way to make it real and usable in your life. So these steps logically build on each other.