Uncertainty: Ally or enemy of the traders.


Having absolute confidence in what we know is something that becomes ambiguous if we go deeper into it, we only have a fraction of the information, uncertainty is everywhere and you cannot escape from it.

This insecurity due to not being sure of what happened, what is happening, and what will happen, produces discomfort in the trader, he begins to feel discomfort and then fears when he realizes that he is not in control of the situation.

To compensate for this discomfort, he begins to weave narratives that can explain past, present, and future events, thus managing to feel that he has control of the situation to operate.

Imagine going down the highway and not having control of the direction the car takes, that situation may seem unlikely, but it is the closest thing to what the trader faces with each operation.

Considering that the trader handles limited information, there is an unknown margin, which may produce a different result than what is seen in the analysis.

The illusion of being in control of the situation drives the trader to seek the “Holy Grail”, the perfect strategy, with complete information, which provides absolute security and certainty of future movements.

In the financial markets, we find uncertainty, and the quicker you can live with the idea that you have no control over what the market will do in the future, the closer the trader will be to traveling down a path of consistency in trading.

Unexpected events, order, and chaos are part of the financial markets, understanding uncertainty allows you to better face the day to day of trading day, this is the focus of this article.

To begin with, it is necessary to recognize that uncertainty is a personal matter, two traders can have different information, and each of them trusts their information, they only differ in the degree of uncertainty, then it is not the uncertainty, but “your uncertainty”, in reality, that uncertainty describes the relationship of the trader with his vision of the financial markets.

Uncertainty is present in the climate, in the acceptance of a new product, in the game of soccer, and also in the financial markets, we do not have certainties, however, it is possible to live with it, and learn to adapt to the changes that can manifest.

Uncertainty is present in our lives, it is obvious, that we cannot know the future, we repeat it insistently and ad nauseam, philosophers and intellectuals say it and we find it in innumerable books.

However, there is still resistance on the part of traders to accept that there are no certainties of future movements, they insist on the search for gurus who tell them what the market will do in the next hour, the next day, the next month and the next year.

The guru of the moment always emerges, and generates applause with the successes and frustration with the failures, as the saying goes “even a broken clock gives the correct time twice a day”, these gurus will be right, it is only a matter of time, but the big question es ¿why do traders continue to believe in financial prophets?

When the trader accepts the uncertainty, he understands that he only handles a fraction of the information, his analysis has a percentage probability of success, then he avoids the prediction or forecast because he understands that it has an air of spurious precision, and his statement now becomes a “probably”.

Once a trader realizes that the solution to the trading conundrum lies in embracing uncertainty, he will stop searching for the Holy Grail and focus on his trading consistency.

Uncertainty is the soul of financial markets, it allows opportunities for all and advantages for none, if the market had a linear and predictable structure, then it is possible that someone discovered it and took all the profits for him, at that time the market it would cease to exist, and if the market was completely unpredictable no one would have any incentive to participate because there would be no profit, then it would also cease to exist.

This translates into a great opportunity for the trader since the results depend on his ability to adapt to the price consensus of all participants, expressed in bullish and bearish candles, like a living and disordered organ.

The Austrian school argues that prediction is risky at best and impossible at worst. Uncertainty cannot be eliminated; it is part of the nature of free markets. If this argument is true, then uncertainty is necessary for markets to exist. To evolve and adapt, free markets need uncertainty.

Although many prefer to think that there is an entity that manipulates and controls all the movements of the financial markets, the reality is that there is a spontaneous order that arises from the perpetual interaction between the different participants, allowing each interaction to generate new conditions for the market, and this, in turn, conditions the individual participants to update their strategy.

This process is perpetual, dynamic, messy, organic, and alive, and it is what defines complex systems.

The trader, accepting that uncertainty is the underlying nature of the financial markets, can use it to his advantage, adapting to changes in market conditions to take advantage of the opportunities it presents, following the trend instead of resisting and going countercurrent.

With this approach, the trader accepts uncertainty as an ally, has better conditions to handle unexpected impacts, with a mental structure that is flexible in the face of changes, and at the same time rigid to comply with the risk management plan.