Managing uncertainty
Speculation is dealing with the uncertain conditions of the unknown future. Every human action is a speculation in that it’s embedded in the flux of time. —Ludwig von Mises
We must accept the randomness of our short term results, and understand our long term edge to stay calm in the face of uncertainty. Traders are entrepreneurs.They don’t trade for a regular paycheck, but they exchange that uncertainty for the potential of unlimited profits. New traders have a difficult time coming to grips with the uncertainty of the markets. It’s hard for them to accept short term losses on the path to long term profitability. There are no guarantees in trading, only probabilities and possibilities.The more unknowns you can remove from your trading, the lower your stress level will be.
One of the most powerful things a trader can do to become calm is to limit their losses on a single trade. This is accomplished by limiting any one trade’s position size, and having a stop loss in place. Buying option contracts in place of stock eliminates the possibility of losses larger than the option price. Traders that sell options should always have a hedge in place, using a long option to cap the size of a loss. By limiting your open trade positions and total capital at risk, you remove much of the uncertainty.
Since you can never be certain about what the market will do, you must turn your attention to what you will do. Traders have to have confidence that they will follow their system and plan. The financial dangers of going off your trading plan and position sizing parameters are not just financial, but also mental and emotional. While it’s possible to trade the uncertainty of the markets price action, if you’re uncertain about what you will do in response to that price action, you won’t make it.
A profitable trader’s confidence is not in the fact that they know what will happen next, the confidence is in knowing that they will respond to the market’s action within the parameters of their profitable trading system, in a disciplined way.
Hall of Fame baseball players have more strikeouts than home runs. The ability for star athletes to experience the uncertainty of each at-bat without losing their confidence in their training and process, is what makes them win in the end. Just like in sports, traders with the ability to manage the mind will set themselves up for long term success.
One of the greatest life skills a person can possess is learning from losses instead of quitting. Growing your enthusiasm instead of shrinking from negativity will allow you to see yourself, the markets, and the world differently. Market environments shift quickly. They can go from range bound to trending. Prices can go from volatile to little movement. Short term results can be random; it’s the disciplined, long term execution of a trading system with an edge that will lead to a winning career.
Great traders are profitable because they have become masters at managing uncertainty. They don’t win because they can see the future, they win because they are certain of what they will do, in the present moment, when faced with uncertainty.
Exercise:
Managing uncertainty is critical to your success as a trader, and a big part of that will be being able to realize that stressful things will happen, but you will survive. This exercise will help you overcome your fear of the unknown.
First, find somewhere quiet where you can be alone with your thoughts. Make sure you are comfortable, and take a few minutes to just relax and slow your breathing and your thoughts. If a specific trading fear or worry starts tugging at your thoughts, then you can address it with this exercise. If not, just pick an imaginary scenario that you think could cause you stress.
Think about the worst thing that could happen to you during one trading day. Don’t string days or weeks together, just focus on one trading day. What do you see happening? Is it a black swan event, something that you couldn’t see coming, something no one predicted? You can’t get into your brokerage account because all the servers have crashed? What is the WORST thing that can happen to you at that moment? If you are trading with a plan, with proper
position sizing and risk management, you shouldn’t have much to worry about. Even if you take a loss, it won’t be a big one.
Remember that if you trade your plan, you will be fine every time, no matter what happens. When you deviate from your plan, you will put stress on yourself because you know you are putting yourself at risk, and if an unforeseen catastrophic event occurs, you will likely suffer mentally and financially.
(resource : calmtrade) | instagram - wisemantrading
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