An Ode to Ambiguity Aversion

They say the market’s ambiguous – well that’s a lot of crap!

I’m right – that’s all I need to know, but why then won’t the money flow?

I’ll show them and prove to mum that I’m not just some lazy bum like dad.

I’m smarter than my grandfather too.

But oh, there is so much to know: those fundamentals, and then the technical show.

Got to keep learning, how else can I know enough to be certain of what I’m doing?

How many factories has the company got? The CFO has grey eyes – so what? Hmm that might be an edge or not.

And what of that “golden cross?” the implications of which have got lost, amongst all the other stuff to know.

Hell, is that a “flying pig?” maybe just the “kitchen sink” I think, as I search for the meaning of these obvious chart patterns.

Don’t you see them? Ha, you’ve got no hope. I’ll take your money now – you dope.

There’s an opportunity – what an absolute certainty! No one sees it, only me. I’m so right and smart!

But where are the buyers?

I’ll just wait until…

Oh bugger, it is taking off. I WAS right! I knew it! How obvious was that – too easy for me.

Too late to buy – I’ll wait.

Where the hell is the retracement?

I’d better wait for it to come back before jumping in.

They say the market is ambiguous. No way, this is obviously going to the sky!

The retracement’s here – now I’ll jump in. Why the hell isn’t this rallying?

The market is not logical – I know more than them.

It’s sliding now – too late to sell, but why would you when you know so much. Nah, it is going to the sky – you know it just hold on.

I’m sitting this out it will come back….

While I wait I need to know more about how the market works.

It is not ambiguous that I’m sure, it’s just rigged so I need to know more.

Why I have not accepted ambiguity in the markets?

Well first I had to learn what it was, and then I had to come to understand how it controlled my actions on the unconscious level.  Now that I have become aware of Ambiguity Aversion, I have accepted its energy and how it has affected my trading decisions.

As a result of not accepting multiple outcomes my fear of regret was fueled. This only cost me money.  In a winning trade I would cancel my exit order for fear it would continue then watch the market pull back or I didn’t stop out for fear it would reverse.

For me, my want of being in control, being right and the want of obtaining quick measurable results only magnified my unconscious aversion to ambiguity. These three wants make up my fear of regret. I was not getting to where I thought I should be in my trading. Fear of regret was in fact causing my setback.  Even though I did the exercises to manage ambiguity aversion, I look back now and I truly did not feel it until after the trade. My three fears still overpowered my ability to truly see the market with a clear perspective. This resulted in profitable trades disappearing.

My control comes from being in my own business. In having success providing a product or service to help others obtain their objectives or offering a solution to a problem.

I would feel good about this and get paid for it.

The market could care less about me.

Being right stems from the above, the more I was right, the better I felt and the more I was paid.

Again the market could care less.

Measurable results, the more on your resume the more value you bring. Right?

Again the market does not care.

Now being aware of the above and how it has negatively affected my trading, I need to be fully aware of my three wants and fears. Trade only when I can clearly feel they are not contributing to my decision process. I will then see the market for what it is offering.

By doing this, what I want out of trading will be a byproduct not the driving force.

To help me lesson my fear of regret, I write before each trade session;

By NOT accepting multiple outcomes has NOT helped me to date!

No one really knows what will happen; the purpose of any ONE trade is

just part of the process.

Writing these two things will keep my focus on the bigger picture i.e.; monthly performance, and take away the importance of any one trade and therefore the fear of missing out or regret will be lessened.

By widening my emotional vocabulary, I now have learned to anticipate, recognize and most of all embrace my feelings to bring the unconscious to the conscious.

This gives me my edge over the other traders who do not accept or understand their own aversion to ambiguity.

The markets are ambiguous; anything can happen with so many people playing in different time frames in one playground, no exit will ever be perfect. The reason I am in the market is to make money, not prove I’m right. If I sell and it runs so what, I will get them the next time. If I get stopped out, say you bums and get them next time. Play the game as if it liars pokers and call their bluff. In the mean time take their money.

I look at the chart and see all of the people

Bars move up then down, forming a steeple

I envy that run, but miss all the fun

Unclear of direction, I pray to the sun

Today’s a new day and the markets deceptive

I’m feeling alert and focus on being perceptive

But why can’t I see a good trade to make

And be like the other traders, and partake!

The indicators on the chart provide a diversion

Allowing me to avoid my fear and aversion

But what’s there to fear, we’re all human here

Finding our way through discomfort in uncertainty

I ponder the markets vagueness, volume and volatility

Then wonder why I focus solely, on matters of triviality

When ultimately to progress, I need to regress

To feelings in childhood that have not been expressed

I’ll write in my trading journal, each and every day

And look forward to the profits that are coming my way

That Pesky Ambiguity

I admit ambiguity makes me uncomfortable. I prefer sure things, and speculative trading sure isn’t one of them. I recognize the ambiguity of the market instinctively—but even my logical mind sees its inevitability. I buy a contract, thinking it will go up in price. Who sold me that contract? Someone who, looking at the same chart, thought it would go down, or at very least that it was no longer worth tying up his capital. If I’m “in tune” with the market—which I spend a lot of time trying to be—some part of me will be sensitive to that seller’s conclusions, always inconsistent with my own.

This is not just an academic question: if I lose, I lose real money. Speculation is dangerous, it can be painful. How do I deal with danger, with pain? By adding layer upon layer of “confirmation”? By grabbing a quick profit “before I get caught”?  By a do-and-die “Charge of the Light Brigade”? Hoping for a miracle? These are very expensive ways to pretend that ambiguity can be ignored or eliminated.

After I enter a position, I quickly sense the thousands of participants who are seeing things opposite to me. And there’s also the matter of time frame, especially the shorter time frame, which triggers a sense of ambiguity (that is, “doubt”). I buy the Euro at 1.3265 looking for a 20 pip move to 1.3285 on the 5-min chart. It moves in my favor to 1.3282, then stalls and pulls back to 1.3275. On the 1-min chart, this may have been a great set-up for a 3 pip scalp short. I’m not trading on the 1-min chart and this is not my trade, but I’ll sense it as a reversal. In fact, it is a reversal—but only for the 1-min scalp trader. These smaller time frame moves make the ambiguity of the market impossible to ignore, especially if I’m zoomed in.

So, can I learn to love the ambiguity of the market as much as Sarah Silverman loves Babybel cheese? As a market speculator, I’m at least grateful for it. Ambiguity is an inherent feature of the speculative markets; thus, without it I couldn’t be trading. Beyond that, and more to the point of this workshop, since aversion to the market’s ambiguity leads traders to try to create an illusion of certainty, which in turn distorts their good judgement, embracing ambiguity (though not quite in the Sarah Silverman sense) gives a big advantage. The fact that embracing ambiguity is really hard to learn is actually a source of comfort: while other traders are ever chasing the next holy grail, the trader who has learned to embrace ambiguity will continue to have what Warren Buffett calls a “barrier to entry”—and in plain sight. I could learn to love that.

Uncertainty’s Consort

The wind waits for no one

Without warning, her sweet caress seduces
the wild and innocents
There is no satisfaction
She is faithful consort only to uncertainty

Shivers of rumors and unrequited stirrings
shake to the cadence of loss
A signal sights
The silence sounds
Shards of knowing
A touch felt
Echoes dissolve
She blows through the divide

Her seamless totality basks through the dark
Ride high on her whispering wings
Breathe her in. Twilight bosoms her dawn
–

To the melody of the Jungle Book’s Bare Necessities, here’s a little song about ambiguity aversion. Best sung with Louis Armstrong playing the original in the background!

http://www.youtube.com/watch?v=MbUv_Tnnl2g

Embrace the ambiguities

The simple ambiguities

Don’t chase every tick in every move

Just face the unpredictability

The financial markets’ recipe

For bringing opportunities to you

Throw away your stochastics, forget about Gann

Stop testing mechanical systems, and Bollinger bands

The markets just aren’t that precise

So what’s the sense in trying twice

To find a holy grail that will pay

Each time a signal comes your way

Believe me, I’ve tried a few

But those ambiguities will always get to you!

Embrace the ambiguities

The simple ambiguities

There’s just no way to win on every trade

Accept the Knightian uncertainty

And do your best to rest at ease

And remember historical probabilities can change

Now when you’re looking for an entry, or a price to get out

And you can’t make your mind up, next time don’t doubt

Don’t try to pick the perfect spot

There may be one, there’s probably lots!

Just trust the intuition that you’ve got

And you may well hit that big jackpot

So let me give you a clue

Just let those market opportunities come to you

So just try and relax, stay calm to the end

And listen to the market rhythm, cause let me tell you, my friend

Don’t waste your precious time like me

Chasing precision and certainty

When you find out you can trade without ‘em

And take each trade not thinkin’ about ‘em

I’ll tell you something true

Those opportunities each day will come to you

They’ll come to you!

[Reprise chorus]

Embrace the ambiguities

The simple ambiguities

Don’t worry about every tick in every move

Just face the unpredictability

And put your trust in Trader Psyches

To bring the right mentality to you

As I go about proselytizing about the value of being aware of one’s state of physical, mental and psychological capital, I routinely get the same questions -

1. Exactly how to be self-aware

2. How long will it take?

Let’s assume you believe that it is as important for your trading to be self-aware as it is to be market aware… (that is a big leap you know because it is SO easy to focus on the intellectual cognitive dimension and miss everything else). Get started this way -

1. Organize your life with the priority of getting enough sleep – this will automatically improve your perception about risk but also about opportunity.

2. Aim to always know how you feel phsycially and emotionally.

3. If you are frustrated, angry or fearful … write it down! Keep writing until the intensity lifts. (No you won’t miss the single best trade of the year!)

4. If you want more immediate help, tell someone who is a very good listener about those feelings. (If they say “ah don’t feel that way – they are not being a good listener).

5. Repeat.

Now, what this list doesn’t say is what will happen if you make this approach a standard part of what you do.

The most important part is that for every time you actually feel a feeling and put it into words you will be granted a time when you see your positions more clearly, make a better decision and risk less. Let’s suppose you did that once a week for 3 months (not making the bar TOO high here) … what would be the difference? Better yet, let’s suppose you did it after an annoying losing trade. How would that scenario turn out differently? Could you avoid the flurry of stupid trades that only waste money and “annoy the pig” (as in teach a pig to sing).

How long will it take to do this? Well… it depends

a. Do you believe it will help you? If you don’t really believe it… well you won’t be able to do it.

b. Do you commit to doing it – or would just watching the markets be more interesting?

c. What level are you starting from?

Dr. Brett Steenbarger once said he preferred to coach only professionals because lots of independent traders wouldn’t do this work. Coaching both groups currently I am coming to see what he meant. If you want to jump ahead of the pack, take this edge – it really is there for the taking.

In many ways, many traders end up shrugging their shoulders to the tune of “oh well I will do better next time”. The question becomes /what exactly/ will make them perceive, decide and act “better” the next time? I mean it isn’t like there aren’t tons of methods and tools to help a trader with their decision making, their psychology and their emotions.

Maybe, could it be, that the tools have a fundamental flaw?

IMO it is – and that flaw is literally in understanding how the brain – when dealing with uncertainty – makes a decision. Based on my research for my upcoming book (McGraw Hill, 2011) MARKET MIND GAMES, the sequence is like this.

1. Contextual pattern matching – does what I am looking at look like something I have seen before? This step is to identify what it is you are looking at it. (i.e. is this my trade set-up?).

2. Application of a percentage of belief in what you think we you are seeing. How much confidence do I have in what I think is the pattern match? THIS IS THE KEY MENTAL STEP THAT HAPPENS MOSTLY UNCONSCIOUSLY AND COMMUNICATED TO YOU ON A VISCERAL FEELING LEVEL!

3. The emergence of a perception that underlies a decision and an action.

4. Acting – or the “behavioral expression” (Credit Kerry Ressler of Emory on Charlie Rose for that exact term) – of the feeling of confidence in the contextual analysis.

So…. how much “intellect” is involved? Well in the traditional sense of the word, the intellect is the historical learning that allows step one to take place. In the new paradigm of emotions, not all that much. Eric Kandel, the Nobel Laureate, said on Charlie Rose recently – “Everything we do MUST have an emotional charge”! (May 26, 2010, Brain Series #8).

Most traders spend all of their time on the pre-cursors to all of this – gaining the intellectual background. If they don’t have the results they want, they stay stuck in the pre-step 1. Instead I and my clients who have tried it, highly recommend getting analytical about steps 2 & 3. The context of confidence or context of feelings that one brings to the perceptual process is literally EVERYTHING! Without knowing that “fC” (and the U-fC for unconscious feeling context), the only choice you are left with is to act out feelings without knowing what is happening.

Get out ahead of it – and it will put you “in the zone” much more often!

Everyone knows what they /SHOULD/ do… and everyone has trouble doing it. Why? Lots of reasons -

Market ambiguity compels you to make impulsive judgments … . Not enough sleep… . I can go on and on and on… and talk to you about your emotional architectures and using emotion analytics to better manage your risk as well as better deduce opportunity.

But here is a little “emotion analytics” trick -

Ask yourself – as you are contemplating entering or exiting a position “How will I feel if…. ?” … and then play out the scenarios, #1) the trade continues in my direction, #2) it pulls back and takes away some of my money, #3) it ….

By putting yourself into your potential future emotional contexts, you can make better “risk” judgments in the here and now.

(And oh yes, I know to some of you this sounds absurd…that is OK. Everyone that I have taught to do it, makes more money than when they just tried to use so-called discipline to intellectually overpower their desires to get in or out or… in and out … or ….)

Here are some of the things I’ve been thinking about:

The two areas in trading that separate the men from the boys (so to speak) are:

1.) The ability to divide environmental perceptions in half and process them separately. First I ask myself what I am feeling and in doing so I acknowledge and honor the feelings so that they don’t cry out for expression on the chart. Then and only then I ask the market what it is telling me. (I used to combine these two observations; I used to subconsciously deny how I was feeling because I knew it was wrong to let my feelings dictate a trade and so the feelings were bleeding into my technical observations because I had not acknowledged them and honored them.)

2.) The ability to execute according to #1 as if I am even or in the black when I am in the red. If during my 90 minutes of trading (09:30 -
11:00), I’m in the red, usually the feeling is something like “I’m afraid! I want to be in the market! I want to be in a trade!”

re A.N.N.A.:

I realized it’s not enough to intellectually understand ANNA. I had to write my own version of the ANNA software for my own internal hardware. When I learned to ride a bike, even though I’d observed someone else doing it and they told me how, I still had to write the program in my own head about how to balance and pedal. It couldn’t be just an intellectual understanding.

re trading plan rules:

I think that if you need strict rules, you’re not ready to trade cash. Strict rules mean that you’re not in control of your emotional feedback
in a live market. I’m not tape reading and I have general ideas about where I get in a trade (ideally the pullback at the end of a trend) but
I don’t have strict rules because it seems trading is an art not a science.

-Trader Diagnosis