If you want to describe the market in one word, what would you choose? Mysterious, enigmatic, or magical would be the first ones that come to your mind, I betcha. Because it is the nature of the market — uncertain.
Supports tumble, resistances break and trendline meek out. Period!
However, you got to trade that they are to hold than break.
That’s technical analysis for you. Peach of a beauty!
So, you can never be sure of what is going to happen next.
And mind you, no matter how much you get old with the market, you’ll still feel the same.
So, how to navigate this hostility and uncertainty in the market?
Here are some tips for you.
#1 Accept the market uncertainty
When you’re neck-deep in the market with brimming knowledge and exceptional analytical skills, you often come across the so-called ‘fool-proof setups.’
You can’t resist the temptation. You want to make the most of it. Hence, you go all in.
But when it goes awry, you tend to ponder, “Why does this always happen to me?”
Remember, the market is a coin, and there are always two sides to it.
When you buy, someone sells, and they have decided to go short based on their so-called ‘fool-proof analysis.’
And the market decides who is going to end up as a fool (just kidding).
Nonetheless, it implies there is a logic to be at the far end of the rope.
Sometimes you end up at the right end and other times you don’t.
So, there is nothing certain in the market except uncertainty. And you got to acknowledge it.
Ergo, whenever you encounter an infallible setup, repeat the above verse to yourself.
Brace the reality!
But, some setups do exhibit more conviction than the others. Should you make a penny out a fortune reaper?
#2 Learn to deal with probabilities
When you flip a coin, every outcome has a 50% probability.
A trade setup also two outcomes — success and failure — however, it is quite different.
Its probability ranges from 0.01 to 99.99%.
And the value depends on your analysis and interpretation.
For instance, if you’re a price action trader, and you find a setup based on price action, then assign a possibility of 60%. If indicators confirm it, notch it up to 70%. And if the long-term chart or a chart pattern also validates it, then take it up to 80%.
However, you can never be sure 100%. Even if all these factors coincide, it can still falter. That is the market for you.
Hence, never go all in.
Take the case of crude oil in the above chart. It had every reason on the book to go up. A double bottom formed, the price had crossed the critical resistance and formed a higher high as well, broke a year-long trendline and the MACD indicator was in the bullish territory. So, any sane trader would have gone long. But, the market had other ideas.
Because Iran found a passion for world peace on that auspicious day and the country’s minister went on the wire that their nuclear policy is up for negotiation. And the sidekick of the peace gesture sent the bulls to the slaughterhouse. However, Iran clarified later that their minister’s statement was misunderstood. Yet, the oil market didn’t recover. Intriguing! However, if for some insane reason, you were a bear that day, you would’ve rejoiced.
These things happen in the market, day in day out. You can’t resist or fight the uncertainty in the market because it is the primer that brings volatility and liquidity, in turn, profitable setups.
So, what should you do?
Counter market uncertainty with stop loss
No matter whether the set up has a 10% or 90% probability, always trade with a stop loss.
Even when you’re super-confident with a setup, still trade with a stop loss. If needed, opt for a wide stop.
Because the market always deliver profitable opportunities and you got to live another day to make use of it.
When you trade without a stop loss, you expose yourself to grave risk by letting your account vulnerable for a blow.
And stop loss curbs it. So, make use of it.
Prefer Partial Profit over break-even Stop loss
When a trade runs to your favor, you get ‘unrealized profits.’
Although it is unrealized, it is still a profit, and you got to protect it as if it is your own.
But breaking even to your entry isn’t the best way to go, as a pullback is one of the ordinary course of market events.
Instead, you can cash out some of your gains and let the stop be at its original value.
By this way, you get a reward for your analysis and still be in the game if the market runs off.
On the other hand, if you break-even the stop, the market most likely hits it and then takes off.
That’s market uncertainty for you!
And it stings a lot.
Is it getting too pessimistic?
#3 Hope for the best, plan for the worst
Don’t be too skeptical about the market, owing to its uncertainty.
It just has its share of flaws.
Keep it simple and have a positive attitude.
For instance, always expect the trendline to hold. However, when it breaks, make sure you don’t lose much.
And so, define a routine that prepares for any hardships to come. Here is a list of pre-trade routines that pros do, before placing a trade. Check it out.
However, all these intricacies matter when you can figure out what’s happening in the market.
What if you can’t comprehend what’s happening in the market?
#4 Stay out when you can’t figure out
The market has multiple tendons tethered to it — GDP, interest rate, inflation, technical trend and most of all sentiment.
When all these factors converge on one side, the market makes a grand rally. It’s a beautiful sight to watch, had you experienced it.
Even a newbie can make some easy bucks if he flows with the market. Profits! Accuracy! BANG! BANG!
And it goes to the enigmatic state before you realize. But, the compulsion to trade sticks with you.
You could not identify whether the trend is going to continue, reverse, or consolidate. Despite the predicament, you make the trade owing to the compulsion.
These are the times when you lose your hard-earned gains. And you fall into the quicksand trap of revenge trading.
So, stay put when you’re not certain. There is no shame in it. Even the experts do it from time to time.
When you put a pause for a day or two, everything falls into place, and you crack the puzzle.
So, give yourself a break!
Concluding Market Uncertainty
Yes, the market is enigmatic and uncertain. But it is not beyond decoding. There are people who have decoded the market uncertainty and yielded fruits regularly. So, if you work hard, keep it simple and do take a pause whenever necessary, you’re also bound to succeed.