Original post from August 30, 2011
All this crazy volatility that we’ve been seeing lately reminds me of an excellent interview done on one of our stars from the forums, TalonD. Amongst the abundance of wisdom shared in that interview, there was one piece of treasure that continues to hold true with every trader, whether they realize it or not:
“The only thing you can know for certain is that you can’t know anything for certain.” TalonD, I couldn’t have said it any better than you, my friend.
It can be said that currency trading truly is the most challenging market. The currency market is like any wild beast that’s awake 24 hours a day; it can be a wee bit irrational and cranky. 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 shifting environment and unprecedented events, it looks like this increasing uncertainty will only make the beast that much fiercer.
As we continue into a world of competing monetary policies, unsteady global economic recovery, and constantly shifting investor sentiment, 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:
The first step is acceptance. Ray Dalio, founder of the world’s current #1 ranked and largest hedge fund, Bridgewater Associates, once wrote in reference to 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 tools money can get ya–he 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 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 variable possible.
Yes, you WILL have losing trades. 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 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…
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…”
The reality is that even a doctor with many years of experience would conduct many tests, and if necessary, prepare a team of highly skilled professionals to perform open heart surgery and be ready for any unforeseen complications. 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?
Is it really that simple?
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?