BarroMetrics Views: New Ideas on Uncertainty

In the Blank Swan, Elie Avache argues that because each moment the market starts anew, probability cannot apply to the markets. In a recent newsletter, Denise Shull says that trading requires:

“getting comfortable with total uncertainty while being on the lookout simultaneously for change and for things to stay the same”

It seems to me that it’s easier to take the view that the scenario our minds have created is correct only to the extent that the market is confirming our judgment.  The scenarios we create need to have positive, neutral and negative benchmarks. In other words, when we take a trade, we have an idea of how the markets should and should not behave. And if they are not behaving ‘correctly’, we need to have enough confidence to exit the position - because at that moment, the probabilities no longer favour the trade.

It’s difficult executing this way because the market may prove the original trade correct, and the exit incorrect or premature. This result is the price we need to be willing to accept for early exit. The market may seem to be conforming to our idea of what may happen;  then a new stimulus strikes changing the whole scenario. This constant change is why Denise Shull says we need to be comfortable with total uncertainty and why Avache says probability does not apply to trading.

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