2 Ways to Deal with Uncertainty in Forex Trading

Updated from its original posting on 08-30-2011

It can be said that forex trading is one of the most challenging markets to master. Like any wild beast that’s awake 24 hours a day, it can be a wee bit irrational and crankyforex uncertainty. And with the slightest agitation, that beast can unpredictably go from docile to volatile and back again in an instant.

Given that we are in uncharted waters in terms of a volatile environment and unprecedented events, it looks like this increasing uncertainty will only make the beast that much more fierce. As the global economy faces the possibility of slowing down again and as political leaders struggle amongst each other to resolve conflict, what can we do to prevent uncertainty from crippling us with fear?

In my experience, battling uncertainty and getting past my fears requires two simple things:

1. Acceptance

No one could have put it any simpler than when Ray Dalio (founder of Bridgewater Associates, one of the world’s largest and top-ranking hedge funds) once wrote in reference to the market speculation that, “No matter how hard you work, you can still be wrong.” With his 35+ years of experience in the markets and working with some the best people and trading tools, he still attests to the fact that there is no perfect pill or holy grail to trading and investing.

If you have it in your mind that your analysis skills will be so good or that you’ll find that perfect mathematical formula to building a flawless trading record, guess again! The reality is that unless you can see into the future, you won’t be able to predict every market move or your mech system won’t be able to factor in every imaginable variable. Yes, you WILL have losing trades and, if you can’t internalize the principle that no matter what you do you’ll never know everything that’s around the corner, then you will continue to be blind to what’s really going on and be unable to adapt to the ever changing conditions.

Now, everyone is different, so the catalyst for a paradigm shift to acceptance may come at different moments for each of us. But you can bet that it usually doesn’t come until after a lot of trades and experience…

2. Preparation

The second step of reducing the risk of the unknown is to be prepared. Serious business requires serious planning. For example, would a doctor just say, “Well, I think you have a bad heart. I’ll just cut open and poke around a bit to see what I can find. Just lay back, relax and don’t worry. I’ve done this a million times…” If the doc likes lawsuits, then he may suggest that plan of action. But the reality is that even a doctor with many years of experience would conduct many tests and then if necessary, prepare a team of highly skilled professionals to perform open heart surgery and be ready for any unforeseen complications that may arise.

Like surgery, trading is serious business. And while unpredictable factors will always be present, uncertainty can be significantly reduced through proper preparation. Taking the time to study and control what you can (e.g., being aware of sentiment and upcoming news, considering all possible market reactions, controlling your max loss with stops) reduces much of the uncertainty, because you have identified and planned for the “worst case” scenario. And if you already know the outcome of your trade regardless if the market goes up, down or sideways, then how can you be afraid?

Acceptance and preparation sound like no-brainer solutions to overcoming the emotions created by facing the unknown, but of course, it’s easier said than done. The former may go against a belief system already deeply internalized in all of us: there is a logical reason for everything. Therefore we think, “If I work hard and find the reasons that moved the market, I can use it as an edge.” As I’m sure you’ve already experienced, the markets can be illogical and stay illogical longer than you can stay solvent.

The second solution, preparation, just flat out requires work. Like a chef waking up at 4 am to prep for a long day in the restaurant, you just have to put in the chart time, economic reading, and/or system research and testing to be prepared for whatever the market will throw at you–day in and day out.

But don’t worry, if you survive in this game long enough, uncertainty will be overcome through sheer experience. Just keep your head up when you take a hit, focus on developing good trading habits (not profits), and soon enough you’ll be saying, “Uncertainty? What uncertainty?”

  • peter h oltersdorf

    Yes !! The market is illogical at times but sitting in front of your machine for hours to plan for all the things that may affect the market does not make sense! Because?? Hey,folks ! The market is illogical at times. In my humble opinion all one has to do is to learn how to read price-action with the help of Double BB where the second BB has different values in order to difference itself from the standard BB values . I use standard BB with deviation 2 and the second I use deviation 1. Then I wait untill a candle penetrates the lowest band and forms a new candle inside the lower band . It would be a red candle penetrating and a green one forming onside above the lower band. I wait until the NY close @ 5 pm EST. and see how big that green candle is and also where the shadow is longer on top or bottom [ that is one has to learn how to read candle sticks not as a pattern but as each individual candle] . One also has to wait until the whole candle and most of its tail is above the lowest band then I place a PENDING order just above the upper shadow and let the price come to me. I am aiming for a 1:2 setup . The stop I place just below the tail of the previous red candle . For a sell I do the same only in the reverse order. I also use the inner BB bands to trade in the same fashion. Most importantly !! I exclusively trade only 60 Min. charts. and only put in pending orders after the NY. 5 pm close so I catch the London open and check in the morning before the NY open if I have to make adjustments . This way I have to look at my charts only 2 times a day and the whole process takes me no more then 10- 15 Min. each time for 8 pairs. I hope I do not violate any posting rules with this comment. If any body has anything to add to this please post it here. Thank you

    • Pip Diddy

      Thanks for sharing your thoughts and your trading approach.