I woke up this morning, still thinking about ambiguity and my natural aversion to…. Well, mornings.

After a cup of Joe and a slice of shingle with a shimmy and a shake, I set myself down the ponder:

Ambiguity

Coveted by politicians and poets… Distained by science and law.

“political science” or “poetic justice”?

Artist, freed from the needs to record unambiguous reality.

Kodak moment or timeless Monet?

Sirens of synchronous and synchronized sounds.

Add feeling, and you have music.

And of the movement of minds and markets?

Rarely a consensus, always a conversation.

But with whom? I am not sure.

But for this ex-engineer to ponder its meaning, I can  only say

The mind is a very strange place to be.

By the way, have you met to friends, Russell the rabbit, and his friend Eias the cat?

the peak

n

e

a

r

i

n

g

the

snowy

summit

the comforts

of the slow and

steady climb slip away

the air has changed

gazing off the windy peak

inside churns – excitement erupts

voices clamoring to be heard

Maslow entices me to take it to a higher level

Darwin implores – be careful, you’ve got to survive this

and all the insane monkeys screaming, “just go for it!”

it is the child who silences them all

for a moment he basks in

the feeling of this place

simple

pure

alive

quiet

off

he

soars

down the

mountain

like a

playful

hawk

knowing

not

what

else

to

d

o

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.

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

You see it all the time… a market that goes back and forth and back and forth and back and forth over the same price range. I learned to call this “chop n’ slop’ back in my Chicago LaSalle street days.

Something I observed since then, with the help of talking to about 1000 traders over the course of almost seven years of coaching is that traders LOVE to be short. On at least an intra-day basis, this leads to the inevitable short squeeze burst up out of a trading range… and then usually the “fall flat” reversal  – to which all those who were short cry “I knew it, I knew it”. Well in fact, all of those bored, want to be short traders actually cause that phenom… by shorting, putting their stops too tight and then getting caught in a tip-off fallout of the first way too tight shorts.

Is that what is happening today – as we break out of a multi-day trading range… I don’t know… but it is worth thinking about. Is is long-term players, an election prediction (real hope) or… just a post boredom temporary melt-up?

We all like to talk about knowing the probabilities … and then just sticking to them. Most of us like to harangue other traders for not doing so while finding it not so easy to do ourselves.

It isn’t so easy for a number of reasons -

1. Whether you are conscious of it or not, your brain recognizes the ambiguity and uncertainty on your charts.

2. Your own level of beliefs and your confidence in those beliefs (the true “in your gut” feelings that need acknowledged) influences your view of the probabilities. This is more or less what the term “subjective probability” means.

Taleb and now Mr. Elie Aiyache, the author of The Blank Swan – the end of probability, like to say that the whole business of probability and markets is “for philistines”. They are really skipping the reality of how probabilities work inside a brain making a decision under uncertainty. It isn’t that the probabilities are worthless or non-existent, it is gaining a better understanding of how to use them for the tool they are.

Last New Year’s eve I was on CNBC with Mark Haines and I had prepared some truisms for the new year … “The Trend is your friend” being one of them. Mark exclaimed but “C’mon Denise, you haven’t told me anything I didn’t already know!” …Well yes Mark … but I am not talking to you I am talking to your listeners… and they tend to forget.

Never short a dull market is the same. Traders get bored. They like to be short (for a variety of reasons but mostly having to do with the rush I think)…. so when they are bored they think “what the hell – it can’t go up so I will get short.” Then what happens …. usually a vicious, quick short squeeze just before it drops right through the floor.

Why? Most day-traders put their stops too tight – so all you need is one too tight stop market order and it kicks off the one above it and the one above that and so on and so forth… THEN … those buy orders (and their counterparts that were formerly BELOW the market) are gone… and to the day’s floor we go.

So… boredom usually means the market will make a quick trip up before it goes down! … USUALLY.