Matthew Kerkhoff, options expert and editor of Dow Theory Letters, continues his 14-part educational...
Why Great Traders Love Uncertainty
02/20/2014 8:00 am EST
It is often said that markets hate uncertainty, and that is true. We do live and trade in uncertain times, but as traders and investors, we must all learn to love and appreciate uncertainty, says Charles Kirk of TheKirkReport.com.
With uncertainty also comes opportunity. Understanding this concept is so very important, and learning how to profit from uncertainty consistently is going to make a critical difference between your success and failure.
Traders learn through experience the importance of examining and evaluating the markets through placing percentages on various future market scenarios. For example, at the hedge fund where I worked, every morning, traders assembled for a 30-minute, pre-market meeting where everyone at the firm worked closely together to outline the various potential scenarios for the market that day and then placed specific odds on what they think is most likely to occur and why. One trader every day is in charge of diagramming out the different market scenarios on a whiteboard, which resembles a flow chart, so that the firm has a structured and easy-to-follow game plan. That game plan was also copied and stored so that the firm can later review it to learn and prepare in future days. In fact, at the end of every trading day, they had another meeting to review the game plan and what went right and wrong and why.
By having the plan in place with various market scenarios outlined and positions to profit from those scenarios, uncertainty is no longer a factor. In fact, traders learn to love uncertainty because uncertain market conditions tend to favor those who are the most prepared to handle anything and everything Mr. Market could throw their way.
When the market does something outside of that original plan (it doesn't happen as often as you might think), there is always a Plan B, Plan C, and so on, with a number of preconfigured trading ideas to profit if the market moved in a specific manner different than the most likely scenario. By having this planned structure in place, everyone can then focus on price action and trading setups as they occur, instead of flying by the seat of their pants, or, even worse, finding themselves held hostage or paralyzed by the ticker.
I had the distinct privilege of looking through the archive of the firm's game plans for the past year and was amazed by how well the firm positioned itself according to the plan, and more importantly, how it handled itself when the market did something unusual. In fact, just reviewing past game plans would be incredibly useful as a teaching mechanism for new traders who have little understanding of how the pros plan their work and work their plan. If you're like me, you'll begin to respect the other side of the trade much more than you probably do already.
As you might imagine, the process of formulating a game plan based on setting percentage odds for various scenarios was very interesting and useful for me to watch and participate in. It also stressed how important it is to have a plan, but at the same time, be flexible enough to adjust as market conditions change. I usually spend at least an hour of prep time before every trading day, but after last week's experience, I will be doing more prep than before. That's how important I think this kind of exercise can be!
So, the question becomes, are you adequately prepared every trading day? In working with many traders over the years, most are not as prepared as I saw with my very own eyes last week. In fact, given the firm's results compared with other traders I know, I have good reason to think that kind of high-level preparation frequently can separate the winners from the losers.
Yes, it is true that we call can get lucky (every trade, in theory, has a 50% chance of working out, correct?), but over time, the market will remove that luck factor and your success will be determined primarily on consistency and how you plan and deal with uncertainty in the markets. If you spend time every morning engaged in developing your own plan, I think you're bound to see steady and significant improvement. As Sun Tzu once said, "Every battle is won before it is ever fought," and that's true for those who engage in doing battle with the market in such uncertain times.
By Charles Kirk, Trader and Blogger, TheKirkReport.com
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