Managing The Uncertainty in Trading

We can’t trade in the past or in the future all we have is the ever present now and our signals.

We have to trade in the now because the past is gone and the future is unknowable. To really be a great trader we have to get comfortable with being uncomfortable. We have to accept that no one has a crystal ball or time machine so the future is not known by anyone and we can only take our entries based on our system and manage our current risk exposure. Successful trading comes from understanding the patterns of past trends in the markets made by traders reacting to their own fear and greed. The past is a map to the future but it is not a replica. As we move to the right hand side of our charts they do disappear into the unknown future and that is where we get compensated for taking on risk and trading with the trend on the path of least resistance.

A trend trader wants to be aligned with a markets price trend. If an asset class is under accumulation and going up we want to have a process of being long in that market. If an asset class is under distribution and going down we want to be short that market. We do not know if each trade will be a winner or loser at entry so we have to let the stop losses and trailing stops tell us when to exit. We you see a past trends on a chart it will look obvious but that trend was in the past in the present moment that it was occurring it was not as obvious day after day. Traders took profit because it simply could not go any higher. There were traders going short and getting on the wrong side of the trend and staying there. The trend would have also had people buying every pullback of the trend. The trend trader found a way to be on the right side of the trend and ride it for all the profits he could.

Some clues for potential trend signals in real time is higher highs and higher lows in price giving a clue to the market direction going up. Lower highs and lower lows shows the market is potentially going down. Moving averages smooth price information and can show the direction of price on different timeframes. The slope of a moving average can show the trend in price has been. Up sloping moving averages can show a past uptrend while a down sloping moving average can show a downtrend. The edge a trader can have in the present is taking trade signals that have worked over the long term in the past. Highs, lows, and moving averages are not signals they are simply tools to create price trading systems with. A trading system will only work if it is built on the facts of historical price action and traded with consistency in the present moment.

We have to take our entries and let the markets decide what happens next. The future unfolds one step at a time. The future does not exist so we have to trade the present moment price action. We have to accept that we do not know if the next trade will be a small loss, small profit, or a big profit. But we can make sure it is not a big loss by controlling our position size in the present moment. Since we don’t know what will happen next we can’t trade a huge position size. We have to accept that anything can happen at any time in the markets and we have to be ready to adjust to it. If volatility expands we trade smaller. If trends reverse we take profits. If breakouts happen we take signals in that direction. We should never risk more than 1% of trading capital on any one trade so the big unexpected move will not hurt us much. Trend traders are not trying to predict the future because they know that they don’t know what will happen. They are simply focused on trading their system in the present moment and making themselves open to being on the right side of the next big trend wherever it happens. The more you try to predict what is going to happen next the greater your chance of missing what is happening right now.

Trend trading tips:

·         We can’t predict the future because it does not exist.

·         The past is a guide but not a map.

·         Anything can happen in the market at any time.

·         Risk is always managed because the future is always unknowable.

·         Trends can go farther than we can imagine.