Confident In Uncertain Times

The markets can be uncertain at times, and these past few months may be particularly fraught with uncertainty. For example, we had disappointing jobs data last week that sent the U.S stocks lower last Friday. The Dow Jones Industrial Average was down seven straight days in a row last week and its longest losing streak since the eight-day period that ended on Oct. 10, 2008. It was the worst pre-July 4th week for the Dow in percentage terms since 1896. Everyone is a little on edge and waiting to see what happens next. It's at these times where you have to be more confident than ever. It's vital to have a detailed trading plan and to stick with it.

Uncertainty can throw us off balance. We don't want to believe that we may be helpless and powerless to the whims of market sentiment. In his book "Investment Psychology Explained," Martin Pring notes, "we do not like uncertainty. The need to have a firm opinion of where prices are headed is therefore a mental trick that many of us use to eliminate this uncertainty." During uncertain times, it's tempting to believe that we can control anything that comes our way. Feeling that we have control allows us to believe that we are more powerful than we actually are. Some people feel more powerful by rigidly making a firm opinion of where the market is going. They may read market indicators wrong and look for information that backs up their opinion while unconsciously ignoring information that contradicts it. It is vital, though, to stay as open and flexible in terms of your opinion as possible.

During uncertain times, a trading plan can be especially useful. It can keep you on target rather than distracted by biased perceptions of the markets and a powerful need to be right. Set a profit objective and visualize the way the trade may go as you develop your plan. As you imagine executing a trade, think of how the market may go against it. What indicators may signal that the market is going against you? If you clearly specify what you will do and when, you'll be able to fight the tendency to rigidly stick with a biased opinion of the markets.

We can't control everything, but during uncertain times, it's best to control what we can control. We can delineate a detailed trading plan and follow it. We can manage risk to insure that we can survive a few losing trades and allow us to feel assured that we can recover should we face a severe drawdown. We can also try to anticipate adverse events, such as media reports or market news that may go against our trade. That said, it is important to face the fact that you can't control every possible adverse event. In the end, it's wise to accept uncertainty. Don't get fazed by it. Instead, control what you can control, accept what you can't, and if you do, you'll trade calmly, skillfully and profitably.

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