Guest post: How to deal with market uncertainty

I was going through comments on my blog recently (and I apologize for not keeping on top of them. It’s on my to-do regularly list now!) I came across an excellent, long comment from Jochen in response to this post on market uncertainty. Frankly, I’m often awed by the quality of the comments/discussion from readers, but I thought Jochen’s comments were important enough to share them with you in this format. In his own words:

Honestly I do not have a major problem to accept uncertainty in the markets when I have either a winning position or no position at all… I also have no problem to accept it on a rational level by having seen plenty in either charts, live trading or backtest.

The problem really arises when you have to face the downside of uncertainty, i.e., getting hit in the face, losing real money, even not winning the money you believe you were “probably” going to make – when you had a vision of progressing over a certain time frame and you get a hit and it is not in your hands to define the speed of your recovery. There is simply a huge impact by things you cannot control. It may be like sailing or rock climbing or surfing, all activities heavily dependent on ambient conditions you have to accept – no way around it.

I would separate the uncertainty you may experience during drawdowns into uncertainty whether:

  1. you do not have an edge at all
  2. you deviated from your plan
  3. market conditions have changed and your approach may be breaking down losing its edge in the short/mid-term or even forever
  4. it is a short losing streak

I was thinking about the following solutions:

  1. Backtesting, backtesting, backtesting both quantitative as well as manual.
  2. The better defined and documented your plan, your decision making process and your execution (journal), the easier it is to resolve your uncertainty
  3. Simplification of your approach. Simple concepts are the once that have worked over the years. You can hear this over and over again, not only in this blog, but by basically any serious trader
  4. Diversification of your approach.
    1. 2 concepts: trend and mean reversion
    2. trading volatility
    3. trading spreads
    4. trading different instruments/markets, FX, commodities, stocks, international stocks etc.
  5. Patience :-)

Also I would recommend to build a table based on your expected win/loss ratio and trading frequency to see how often per week/month/year you’d expect to see a losing streak of x trades or a drawdown of y%

I furthermore believe there is a profound disconnect one has to bridge, jump or close between the zen-like advice to focus on your process on one hand and the extreme competitiveness of trading and the focus on measurable numerical results on the other hand.

I find it very hard not to look frequently at the numbers, actually I believe it is extremely important to look at the numbers as you have to review your trades, audit your brokerage statement, check whether you are on track in terms of expected drawdown or something potentially broke up, re-adjust your position size as a fraction of PF value etc.

So ignoring is most likely not an option. A couple of days ago I read a post about sucking at something on “zenhabits” and how to deal with it. Maybe this one will help me to accept uncertainty in losing streaks, maybe it will help me in other areas of life, maybe it just entertained me on my rage – ehm, pardon me – journey to become a professional profitable trader… Meanwhile I keep chopping wood and carrying water…


Adam Grimes has over two decades of experience in the industry as a trader, analyst and system developer. The author of a best-selling trading book, he has traded for his own account, for a top prop firm, and spent several years at the New York Mercantile Exchange. He focuses on the intersection of quantitative analysis and discretionary trading, and has a talent for teaching and helping traders find their own way in the market.

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