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2 Hidden Principles of Successful Traders

1)  The ability to tolerate uncertainty – Suppose you take any particular configuration of price in a market; say, trading x% above or below a Y period moving average.  Then look at what that market does on average over the next Y period.  The odds are great that for any value of x and Y, the market’s directional tendency will be swamped by the variability of price within that next Y period.  What that means is that, on average, the signal to noise ratio for a directional trader is low.  Whatever directional tendency is present is generally not statistically significant and not readily tradeable.  Given such a situation, the modal opinion of any trader should be “I don’t know”.  Uncertainty is itself a view and, in fact, should be one’s base case.  When a trader cannot tolerate uncertainty and needs to manufacture conviction, the result inevitably is overtrading the objective opportunity set.  It is impossible to properly manage risk if you are intolerant of uncertainty.

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