The trouble with certainty in trading is that there isn't any. An unanticipated piece of news can change the direction of a stock in a flash and what looked like a sure thing wasn't. Markets can turn on sudden political turmoil. The Fed Chairman can make a statement and stocks turn on a dime. That is why even the greatest traders suffer losses at times. There is no certainty in trading.

I am amazed by the number of emails I get that contain what their authors contend are absolute certainties. Many are what I would call emails with an attitude. Bold statements like: "you can't make money trading options," or "the only way to make money in the markets is buy and hold," or "I want to make money, why would I even consider selling naked puts," or "this market is not bullish and it will only get worse," are chock full of certainties. These notes are generally written with strong, positive language almost as though the language could bully the reader into believing the same certainty the writer perceives. The language, sometimes reaching the level of invective, demonstrates an incredibly strong emotional attachment to the writer's belief. Many of the emails include such certainties about market direction and stock direction. They drip strong emotion.

The simple fact is that no matter how certain I am about what a stock price will do, my certainty will have no affect on the price. I can't will a stock price to go up. I can have some pretty compelling reasons to believe it will go up, but that does not mean it will go up. There is no stock that may not go down on any given day or for any given week. It doesn't matter what you think or what I think; we are quite unlikely to force a stock to move in a given direction on our own.

Those who are emotionally attached to their beliefs about direction of stock or markets are at serious risk of sustaining significant loss. If one believes a stock is going to go up, for example, and it turns down instead, the trader with the emotional attachment to his belief is less likely to cut losses, but rather stick with the belief that "it'll come back." I personally know people who were certain the Nasdaq 100 would continue to soar as we entered the year 2000. Some of those folks bought or added to their position in the Q's (Nasdaq 100 tracking stock) at the $105 level in early 2000 and, because they were sure the Nasdaq would continue to rise, they held on, and on, and ..... The Q's now, almost 8 years later are trading at roughly 1/2 that price. What profit did their certainty yield?

Whatever we think about the market can only be an opinion. It can be buttressed with innumerable facts, formulae, and rationale, but the bottom line is it is still just an opinion. We must be willing to accept the proposition that we can actually have an opinion that is wrong. If we fail to recognize that fact, we are quite unlikely to fail to cut losses and are doomed to fail in our trading. Trading requires the ability to be facile and the willingness to see what the market is actually doing. Saying something, even with real gusto and sincere belief doesn't necessarily make it so in the markets.

Good Trading!
Bill Kraft

December 29, 2007

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