Many psychologists who specialize in the training and education of equity traders focus on the importance of managing uncertainty in your trading practice. I agree with their emphasis, because I believe that your trading practice is composed of equal measures of your self, your systems and the market. Uncertainty plays a major role in each of these three domains.
Uncertainty with respect to yourself consists of the possibility of knowing yourself. We are all complicated mixtures of genetics and environment. We spend our whole life trying to find out who we are and where we came from. It is unrealistic to think that in a high stress situation like trading that we can ever have complete self-knowledge. Perhaps with consistent and focused attention and appreciation for the limits of insights, we can develop enough self-knowledge and self-control to engage successfully in our trading practice.
Uncertainty with respect to your systems has to do with the degree of confidence that you may legitimately have concerning forward performance of the system that you have only back tested.
Because we know that the market is an ever-changing situation, we can never say with complete confidence that the system will continue to perform as tested. As such, there is always a healthy dose of uncertainty that we must remember when we’re deciding at what risk level to trade a particular system.
It is legitimate to use statistical techniques to compare the performance of different systems in different markets but we should never substitute testing for production and results.
Uncertainty with respect to the market itself simply acknowledges that the market is a complex adaptive system that is beyond any amount of compensation. The best we can do is appreciate its mystery and opportunity and respect its power in much the same way that we must respect the power of nature. To think that we can fully understand and therefore control the market is to commit the sin of pride if not foolishness.
Faced with this uncertainty everywhere we look, there may be a temptation to avoid it or to try to control it. In most cases this means you are waiting to feel more confident about your insights and your indicators before you act. Recognize that every second that you wait, every piece of information that you pay for in either time or money, can never completely eliminate the uncertainty. For those trades where you would be successful, this hesitation is eating away at your profits and putting psychological pressure on yourself to chase.
I believe it is better to learn to adapt and learn to act in risk managed ways so that you can capture more of the opportunity while maintaining smaller levels of risk. How you do this has everything to do with your technique for framing the trade once you see a potential opportunity.