The other day a trader wrote me and his letter is published here on the previous blog post… the following is the very end of that letter.

“I’m curious about something. How is it that for thousands of traders, each of whom has his or her own personality, childhood traumas, cultural background, hang-ups, etc, all these things come out in the same few ways in trading? This may not be 100% true, but it certainly seems like most traders have the same few problems: impulse entries, exiting winners too soon out of fear, hoping losers will turn around, and hesitancy to enter a planned trade.  This can’t be coincidental. What is your take on it? I mean, how is it that a trader in Singapore and a trader in Argentina or Kansas have echoes which produce the same trading mistakes?“

The answer to this is the reality that we take a fractalized version of our own basic psychology and apply it (usually unconsciously) to the markets. The markets become past authority figures – and we fight them, hear their voice and react out of the past not the present. In psycho-dynamic speak, this is called “transference” and “the compulsion to repeat”. We actually come to a situation, perceive that situation and react to it with no reference to real-time. Our neurons are firing as they were wired. The FEELINGS we have therefore come mostly from the past… and our unconsciouses will work hard to keep us in that same template of feelings.

This needs to be analyzed for each trader MORE than the market needs analyzed … that is if they want to be consistently and reliably more successful overtime, It even applies to avoiding blowups for the already spectacularly successful.

On the surface, it is a fear to fear spectrum. Greed doesn’t even really exist – once you understand the whole concept of the context of feelings. And it is that – what I like to call the “fC” – and the “fC-E” – the feelings context and the feelings context echo that answers the aforementioned trader’s question. Figure out how it plays in your perceptions and reactions and … out… and you are almost “home free”.

(*Note to the “emotional finance” duo and to  Mr. Howell … you all know this is NOT YOUR intellectual property. Please keep that in mind.)

Dear Denise,

I hope you are well and that your book is coming along nicely. I haven’t written in awhile, but I’ve been having quite a time with the Access course. When I began, I made steady progress through the first four or five chapters, and my trading was improving as well, though I didn’t feel I had “turned the corner”.

The first surprising thing I learned was about ambiguity: all it took to “embrace” it was to physically write down or say out loud “Yea, ambiguity!” I would laugh and then not worry about it; because the benefit of embracing ambiguity was not some great insight into what the market was going to do, rather it was an increase in energy, which I had previously wasted in trying to fight ambiguity. Now I could put that same energy to better use in making judgements. So far, so good.

A few weeks later I had a losing spiral. Of course it began with a BIKB trade. The plus side was that this time I was able to stop myself from trading—not as soon as I would have liked, but quite a bit sooner than previously. Still, I was shocked that I had fallen into such an obvious pattern after all the PsychCap work I had been doing. So, I took a closer look at what happened that day and noticed two things. First, the BIKB trade didn’t just come out of nowhere; it was preceded by a series of trades which I planned but didn’t take (that would have won), and one winning trade which I exited early. I thought I was being cautious, but in fact my second-guessing of my planned trades was building up frustration and impatience. Without that, I don’t think the BIKB trade would have had such a powerful impact on my PsychCap. So the cost of those untaken or poorly executed trades was not just a reduced upside; they were “setting the stage” for a losing spiral.

I also noticed that I had (have?) a deeply ingrained belief that a losing trade has to be “made back”—and not just made back eventually, but right now (and preferably in the same futures contract!). Of course, that’s ridiculous, but it didn’t feel ridiculous at the time.

I’ve dubbed the rest of this year, “Fun with ANNA and ToM”. I’m now in the habit of checking my feelings context frequently (both in and out of trading), using WWW, and stating my confidence level in the “Story” out loud or in writing before I enter trades. It’s made a lot of difference. However, the anticipation part of ANNA, and considering the market action explicitly from the viewpoint of theory of mind, are not yet habitual; I’m building those up gradually.

… END OF PART ONE -The above has a few highlights and paragraph changes so that you, the trader-reader can more easily benefit from this trader’s experience. BIKB is the “but I know better trade”. The other strings of initials are strategies for managing to your psychological capital – the first and foremost edge you can create in trading. Your mental state is EVERYTHING – and it is more important than what the market is doing. Perception of uncertainty is a very tricky brain endeavor – you want to train – just like an athlete – to perceive as well as you can. ….

Part 2 of this note to be published soon.

It’s not black, it’s not white, I can’t even fight

I hate it !

I hate it !

I hate it !

My stomach crawls & rumbles

My palms sweaty,

A rat caught in the eyes of a snake,

I begin to shake,

So many wrong choices, only one right,

Hindsight laughs in my face.

Does she love me ?

Or just need me more vulnerable?

The pitch & roll of my gut,

Oh, how I long for the safety of the rut,

But then, that dreaded mock,

As my ship heads straight for the jagged rock

A slave,

or brave?

To Trade or Not to Trade

Hey I took a trade today

I sit and watch it with dismay

Will the plan follow as I have laid?

Away you indefinite penny arcade

The stench of fear invades my being

Wondering if what I am seeing

Is solid as I think it is

Confirmed or antithesis

Time to jump out its changing it tune

For that trade is not following the phase of the moon

How can I be an entrepreneur?

If I am uncertain and never am sure?

I just sit and watch and waiting for it

To be perfect and beyond just a base hit

How many days of innings I miss

As I avoid being unsure and live in abyss Like looking up from a valley decided and convinced That I will find that place of sureness Without having to wince

As I stay attached to playing a sure thing I will not be trading, instead I am aging With bare knuckle grip that certainty is there And waiting forever for a trade with no repair

All I have done starts with a goal

And I finish it with confidence and control But with trading the idea of working hard And not getting paid has left me scarred

The art of being, not doing, really works well In that moment all is possible, then I trade well The fight within me needs to let go And feel my feelings with knowledge that I won’t know What’s going to happen and go with the flow Not knowing is trusting that I can follow the road With the pleasure of being with presence that bodes

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.