Why always needing certainty could be killing your gains

Not a switch, but a knob

" Absence of evidence is not evidence of absence. " Yeah, read that again. No, seriously. Took me a couple of minutes (it was actually fifteen) before I could untangle my brain and understand what Taleb was really trying to say in his tweet (also in his book Antifragile. Peak book).

The tweet in question is about somebody denying Trump's association with Epstein. Now, while I don't know if the 47th President of the world's most powerful country is a sex criminal or not, Taleb’s point was: just because there is no evidence of something, doesn’t mean that “something” 100% doesn’t exist. Don’t get me wrong, I do believe in the institution that is Law. "Burden of proof" is as necessary a concept as "innocent until proven guilty" is.

But... While suspicion about something isn't cause to act, it should propel us towards seeking more evidence (or against it). We'll come back to this later.

Science leans on principles like Hitchen’s Razor which says "What can be asserted without evidence, can be dismissed without evidence." And rightly so. Just imagining the dangers of pseudoscience outright scares the shit out of me. But on the other hand, imagine if scientists waited for 100% proof of something, how progress would stall! Science to me is the very essence of moving forward when (even when) there is little evidence. It is only when scientists have ventured into the realms of uncertainty that the greatest discoveries have been made.

“But bro I am trader. Why are you telling this to me?”

Because walking into uncertainty is literally all we do as traders.

Before I expand on this, un momento, Let’s first talk about why us humans crave certainty. Why must we be sure about something before we act. (In my opinion, these three words " Are you sure?" have caused more damage to the world than war, famine and pestilence put together) Why must we be right 100%? I believe it's an evolutionary trait. Imagine yourself 10,000 years ago, at the edge of an unfamiliar forest. You didn't know which apex predator was lurking just behind the bush. If you walked in you could be dead in seconds. Our brains , more importantly our egos, were evolved to make sure we didn't crossover unless we were ABSOLUTELY sure and certain that it was safe. Uncertainty in most cases meant certain death.

While we don't have those literal existential crises anymore, we're still riddled with doubt about most things, our biology and the biological response we have towards stress hasn’t changed much (or at all). Our egos take hard hits whenever we're wrong. Uncertainty is painful. And we crave certainty all the fucking time. And that is why Trading is so hard. No, let me rephrase- and that is why WE make trading harder than it needs to be.

Somebody on the HPA group asked me recently – “Since we haven’t capitulated after the slap from the 50 (on the MIDSMALL400), is it true that we won’t test the lows..and hence can we continue to put on more risk?” This question reeks of “certainty-seeking”. Even if I had said Yes, the next question would’ve been what about breadth? What number does the short-term trend need to print for me to be sure it’s safe to get in? Sure, 50%. Okay, but what about the Net 4%, a strong 8 I’m sure? And then there would be something about momentum, and breadth-volume …you get the drift.

(My earlier article about the bounce should give the uninitiated some more context)

Why do we do this? It's because most of us have made trading a rule-riddled switchboard. I make a position when all switches are on. I don't trade when they're (or even one) is off. I put on risk when I'm 100% sure. After all I'm a risk manager first. I am disciplined. Where's my fucking medal?

There is no switchboard. There are no switches that can turn on or off and tell us when to get in or out of positions. ITS NOT BINARY. But we can (and should) develop knobs. As more proverbial ducks line up in a row, as more probabilities stack in our favour, as we gather more evidence, the more we can act. But act we must. There will never be the perfectly certain moment. The only certain thing about the market is its uncertainty.

Let’s go back to the HPA member’s question – So if the “mild” slap from the 50 SMA isn’t evidence enough that there will be a deeper cut, could one perhaps develop a view that A) the mildness could go away soon, and we could see a sharp fall? What further evidence do weneed to confirm that? Or B) we could bounce soon and therefore what evidence do we need to confirm that? Now we have two distinct possibilities, and we should simply stack more evidence to confirm / deny the likelihood of said possibilities. What does the short-term trend need to do confirm the cut OR bounce, what does momentum need to do and so on. And as your favourite bias gets more evidence, more (not absolute) certainty, you turn up or down the knob of your portfolio’s exposure.

Easier said than done. But having a system and embracing the uncertainty and changing your view every day based on new evidence (provided you commit to be an evidence seeker and probability stacker first), will bring the much-needed calm to the storm that your trading may sometimes feel like. Do this over a few cycles, and no amount of uncertainty will faze you. This is called Bayesian thinking.

You may not realise but this, but this is incredibly effective.

It is using the same methodology (probability stacking) I worked out the bias of the following Price action on Midsmall400 last Thursday which has been playing out today.

So, my dear trader, as you stare at your switchboard this week, you might not get eaten by a lion but remember you’re making it awfully hard to make those returns. So, get those pilers out, get rid of the switches and replace them with knobs. Speaking of knobs, I liked Trump more when he was in the WWE. You?