Because the market is random to a large extent, there will always be uncertainty in trading. This we cannot eliminate.
What we can control is how we respond to uncertainty. How we deal with uncertainty is important.
Contents
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- Introduction
- Mindfulness
- Cognitive Restructuring
- Acceptance of What You Can’t Control:
- Learning Opportunity
- Final Thoughts
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Introduction
When animals and humans are placed in unfamiliar territory or uncertain situations, our brains’ amygdala triggers the fight-or-flight response.
The amygdala is a small, almond-shaped structure located within the brain’s temporal lobe responsible for detecting and responding to emotionally charged stimuli.
It helps in recognizing potential threats in the environment.
Dogs and cats have amygdalas.
Bird brains do not, although they have a functional homolog called the “nucleus taeniae” or “arcopallium,” depending on the specific bird species.
Regardless of what you call it, the fight-or-flight response is triggered.
This is a natural built-in instinct that has evolved to help protect us.
We either get out of here, or our body goes into the “prepare to fight” mode.
This immediate, instinctive reaction can override more thoughtful and deliberate cognitive processes.
In essence, the amygdala takes control of the brain’s rational thinking centers, such as the prefrontal cortex, potentially leading to impulsive and emotionally charged behavior.
We don’t want our emotions to overcome our rational thinking in trading.
Otherwise, this is when we make judgment mistakes, not to mention accidentally pressing the wrong keys, and end up selling a call option instead of a put option.
Don’t laugh; it has happened before.
This is why in trading, we need to plan what we are going to do in advance when we are rational, rather than planning by the seat of our pants when the uncertain market is doing something that puts us into emotional “amygdala hijack,” a term that psychologist Daniel Goleman popularized in his 1995 book “Emotional Intelligence.”
When you hear of traders doing revenge trading or going on tilt, this is what has happened.
Not only does the amygdala hijack cause us to make irrational decisions, but it also has psychological effects.
In real or perceived threats, the adrenal glands release stress hormones such as cortisol and adrenaline.
There is an increased heart rate and blood pressure to supply blood to the muscles and an increase in blood sugar to provide extra fuel.
These physiological changes collectively prepare the individual to respond quickly and effectively to a perceived threat.
While the fight-or-flight response is a crucial adaptive mechanism, chronic or excessive activation of this response can have negative effects on long-term health, contributing to conditions such as chronic stress, anxiety, and cardiovascular problems.
Uncertainty is a source of stress for humans and other mammals.
It interferes with our capacity to predict future events, causing feelings of anxiety, hyper-vigilance, and sometimes overreaction.
How can we keep our sanity in a job such as trading, where we have to deal with a huge amount of uncertainty?
As with many other jobs, trading can be a stressful job.
Some professional traders have reported feeling drained and exhausted at the end of the day.
It is no wonder this is the case If one is fighting one’s emotions all day.
In addition, there is the concept of “decision fatigue.”
Decision fatigue is the idea that making many decisions, especially in a relatively short period, can lead to a decline in the quality of subsequent decisions.
This concept suggests that as individuals make more choices throughout the day, their mental resources for decision-making become depleted, potentially resulting in more impulsive or less thoughtful decision-making.
Obviously, the amount of stress depends on the type of trading they do (whether it be 0-DTE, day-trading, or longer-term investing) can have a difference – as well as the position size they are swinging around.
If you want trading to be less stressful, one way is to find the right trading strategy for you and reduce your position size.
You are not going to be as emotionally charged if you lose $100 versus losing $1000.
If you are a beginner, obviously start smaller so that you have a smaller emotional response so that your rational brain is still in control to learn this new endeavor.
As one gains more experience, one will become more accustomed to uncertainty, which will have less impact.
In other words, gradual exposure will build up our tolerance for uncertainty.
However, some additional tips and tricks can build tolerance for uncertainty and mitigate its harmful effects to become more resilient.
Mindfulness
Some traders have reported that meditation has helped.
This is another way to practice mindfulness to stay present in the moment without excessive worry about the future.
Embrace acceptance of the uncertainty inherent in life.
Acceptance doesn’t mean liking uncertainty but acknowledging it without unnecessary resistance.
Cognitive Restructuring
Another psychological concept is called cognitive restructuring.
This is when we challenge our negative thought patterns and catastrophic thinking.
For example, a trader sees a large pullback in the market and thinks this is the start of a market crash that will wipe out half the account.
Really?
Yes, it could happen, and we must take proactive action against this. But rationally, what are the chances?
Acceptance Of What You Can’t Control:
As long as we do all we can to mitigate the risk, the rest is out of our control.
Actively surrendering involves acknowledging that certain aspects of life are beyond our control. We can not control the market.
Acceptance is the first step toward finding peace in uncertain situations.
It means embracing flexibility and adaptability.
Be open to changing plans, adjusting expectations, and finding new solutions when faced with uncertainty.
Learning Opportunity
Instead of viewing challenges as threats, see them as opportunities for growth and learning.
When the uncertainty of the market has taken away a part of our account, stewing about the past will not make it undone.
Instead, consider it as a learning opportunity.
Review the trade to see if we had made any irrational decisional mistakes. Was there something that we could have done differently?
Actively taking losses as a learning process can provide a sense of control over your development and adaptability.
Final Thoughts
Trading can be difficult and stressful due to the uncertainties of the markets.
Humans are built with physiological responses that are quite helpful when we are in the jungles and being stalked by tigers.
However, as modern traders sitting in front of a computer looking at red and green candlesticks appearing, this same physiological response can have a negative impact – both in the short term, as in causing us to make irrational decisions, and in the long-term with chronic physiological effects.
In this article, I have given a few coping mechanisms for you to try to cultivate resilience in the face of uncertainty.
We hope you enjoyed this article on how dealing with uncertainty in trading.
If you have any questions, please send an email or leave a comment below.
Trade safe!
Disclaimer: The information above is for educational purposes only and should not be treated as investment advice. The strategy presented would not be suitable for investors who are not familiar with exchange traded options. Any readers interested in this strategy should do their own research and seek advice from a licensed financial adviser.
Original source: https://optionstradingiq.com/dealing-with-uncertainty-in-trading/