Uncertainty and Trading, Part 2

Baz asked if I was sure about uncertainty? I am not sure whether he means if I am sure that uncertainty is a trader’s perpetual companion or whether he believes there is certainty in the markets…

But for the purposes of this blog, I’ll assume that meant whether I am sure that uncertainty is a trader’s companion.

I start from the premise that charts are a reflection of  the actions of the buyers and seller i.e. a reflection of human action. If you accept that premise, then ‘certainty’ must go out the door.

Nowadays much is made of the findings of behavioural psychologists: that humans aren’t totally rational. I could never understand the fuss - I learned that on my Dad’s knee and I am over 60. Among my trading friends who are successful, I have yet to meet one who believes in the Efficient Market Theory - a theory  created by economists for economists. The theory was based on assumptions that made for pretty algorithms but ones that failed to describe the real world. The sub-prime crisis was caused by the failure to made this essential distinction.

Once we accept that markets are a reflection of human decision-making making, then our probabilities become ’subjective ones’ i.e. probs based on our perceptions. In turn, based on these perceptions, we make certain assumptions; then we base our trades on these. The key point of the process is this: as new info comes in, we need to change or confirm our assumptions.

Let’s return to my EURUSD trade. Those that follow the Forum-Twitter comments know that yesterday I raised the idea that the EURUSD may breach 1.3444 and then rally.  Last Friday,  this idea was such a low prob occurrence that it was only on the periphery of my consciousness. But as price action developed,  the idea became one I needed to consider.

But what if instead of  making uncertainty my handmaiden, I had focused only on one interpretation? Then I’d have shut out the information that contradicted the main scenario and yesterday’s price action would have caught me unprepared.

That’s what I mean when I say traders have to accept uncertainty.