What’s the best thing to talk about when the market is firing on all cylinders? Recessions, of...
Waiting for Certainty
06/05/2009 12:01 am EST
One basic need human beings have is certainty. We're always looking to provide a measure of certainty to our lives. It provides for us a “warm fuzzy” to know that we can live day-to-day and make sure that our necessities for survival are met. However, in the markets, there is never 100% certainty with any trade that is taken. This is one reason why trading the markets is so hard for most people.
When trading the markets, this general search of certainty takes hold of many investors and novice market participants, giving them the illusion that they must buy when they're “certain” that the stock has good upside potential (usually after that stock has doubled in price and has been upgraded), and sell when they're certain that the end of the world is happening tomorrow (usually a day prior to the establishment of some sort of climactic bottom).
This need to be certain is also the driving force behind the eternal search for the "sure thing," that perfect indicator out there that can provide us with a feeling of certainty amid an environment that is completely uncertain. Indicators galore are created with the sole purpose of injecting a level of predictability (certainty) to decision making. These indicators, used as "price predictors," are nothing more than a way to create certainty in a place where certainty flat out does not exist.
In the markets, you shouldn't look for certainty, only for opportunity. This opportunity in many cases won't appear in an obvious fashion. But this is fine, since opportunity isn't created for the uneducated, or he who looks for certainty. Part of the reason why professionals can be wildly successful at trading is because of this law of uncertainty coupled with the pursuit of certainty by novice and unsuccessful traders. Opportunity is created for the educated individual who is willing to take calculated risks in order to achieve his rewards. When you're buying a Pristine Buy Setup (PBS), the entry point isn't the most certain place to be, right? That PBS looks a lot more "certain" after that stock has moved up three bars in a row, right? Hindsight is always 20/20. Notice that the place where opportunity dwells is just that place that makes most novices tremble with fear. By the time they gain a measure of certainty, it’s often too late.
So strive to look for reliable events that present good opportunities based on a methodical approach and then trade those events with the understanding that you're trying to take advantage of the opportunities that the market presents. Realize that you will have losing trades because of uncertainty. You could have “the perfect setup” based on your training and experience, and even those trades are never 100% certain.
So, two key points must be absorbed here:
1) Losses are simply a byproduct of this business. Don’t get overly dismayed and lose control emotionally when you get stopped out of a trade.
2) Remain objective rather than subjective (emotional), and forget about certainty, because the only certain thing in the markets is that there are no certainties.By Tom Willard of Pristine.com
Related Articles on STRATEGIES
One sector that has treated us right is the small cap stocks, which we recommended towards the end o...
The market has been remarkably resilient; most U.S. companies are doing well, and the S&P 500 ap...
Aging economic recoveries and bull markets carry special risk for anyone who is too easily enamored ...