3 Tactics to Beat Uncertainty

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They say that a bird in the hand is worth two in the bush.

Put simply: A small certain result is better than a larger uncertain one. This centuries-old phrase says a lot about our mental wiring. Humans tend to prefer certainty — even though it mightn’t deliver the best outcome.

I read a fascinating piece of research recently, and the findings weren’t what I was expecting. Consider this… what would be more stressful:

1. Knowing that something bad will happen; or
2. Being told there’s a 50% chance of a nasty surprise?

I instinctively chose the first option. But I was wrong. The researchers found that “not knowing” is much worse. This is when we’re likely to be the most anxious. It turns out, the hardest part is the uncertainty — not the actual outcome.

You see, humans have a strong desire for certainty. We’ll often take a less attractive outcome that we know, over a potentially better but uncertain one. And this could have a big impact on how you trade.

People often say: you never go broke taking a profit. They believe it’s better to lock in a price today in case tomorrow’s price is lower. But what if the future is better?

I believe an eagerness to ensure a positive outcome limits your potential. Sure, removing uncertainty may make you feel better. But it also removes the possibility of future benefits.

Have a read of this email. You may even relate to the situation:

“In search of double and triple digit gains over a medium term, it is extremely difficult to hold your nerve when a particular stock may have gained say +30% and then starts to retrace.

“Do I hold on for the ride down or take my profit?

“How do I live the trading style if I am always protecting my profits?”

Member, Peter

I know exactly what Peter means. Every successful trader must come to terms with this. The key is to manage uncertainty. You need to hold your nerve as the shares zigzag higher. But this is easier said than done. As Peter says: “How do you live the trading style if you’re always protecting your profits?”

Well, I have three suggestions. These are strategies I use myself. They help me keep the stress of uncertainty from bubbling to the surface.

Here they are:

1. Trade smaller. You’ll probably worry less when the stakes are lower.
2. Try not to think in money terms — it’s only numbers.
3. Don’t look at your portfolio every day. Set your exit points and walk away.

Let’s go through them…

Trading smaller is a relative thing. It’ll be different for everyone. The idea is to trade a size you can manage. There’s no point taking a bigger position if it causes too much stress. A 19th Century Wall Street saying captures this nicely: “Sell down to the sleeping point.” Simply put, if your positions keep you up at night, then it’s time to trade smaller.

Sure, there’s still uncertainty. But if you lower the stakes, you defuse the stress that uncertainty causes.

The next point is about how you think about money. I remember getting some excellent advice when I was starting out. A wise older trader told me not to think of my trading stake as everyday money. He said $1,000 could buy a holiday or a new suit. The trick is not to mentally link a trading profit to something real. It will just increase the pain of giving that money back.

So think of trading funds as the score. A rising balance shows you’re playing well.

Lastly, don’t get hung up on the day-to-day fluctuations. Set your exit levels and then take a step back. You’ll find the bumps a lot easier to handle if you don’t feel them on a daily basis. And if you can do this, I believe you’re well on your way to making peace with uncertainty.

So that’s all for this week. If you liked this video, or even if you didn’t, scroll down and leave me a comment, or maybe a thumbs up. Also, if you’re watching this anywhere other than my website motiontrader.com.au then head over and have a look.

So until next time, I’m Jason McIntosh, and let’s find some trends this week.

Meet Jason

I'm Jason McIntosh, the creator of Motion Trader. My career began in 1991 on the trading floor at Bankers Trust. Nowadays, I trade my own systems from home in Sydney. 
Motion Trader is for investors who value robust analysis, data driven entry and exit signals, commentary, and education. I use engineered algorithms to identify when to buy and sell ASX stocks. No biases or guesswork, just data driven signals.