Developing Uncertainty Tolerance
Recently, we posted a couple of articles on cognitive-behavioral adjustment ideas for traders. Cognitive-behavioral therapy (CBT) is a tool generally used by patients suffering from anxiety and other personality disorders to overcome their conditions, but CBT can come in handy for binary options traders as well. As a trader, you are constantly striving to improve and correct mistakes in your thinking and behavior so you can become better at what you do. One concept discussed in CBT for patients with anxiety may also be applicable to you as a trader, and that is uncertainty tolerance.
Trading is a Business of Risk
While uncertainty is an unavoidable part of life for everybody, investing is an area of life where the consequences of things going wrong are particularly pronounced. In our day-to-day lives, we often pretend that we are more certain than we really are about our health, relationships, jobs, and so on. But as a trader, you are not given that option. Every day, you are required to confront your own uncertainty head-on. After all, all those trading strategies and risk management plans are there in place to try and help you profit reliably despite that uncertainty. But no matter how sound your stratagems are, trading will remain a business of risk.
Some traders handle that fact just fine, but they are a minority. Most traders struggle on some level with the fear that they will lose money, or that they will miss a key opportunity to win. You may be able to cope with uncertainty in most areas of your life just fine, but may struggle with uncertainty in trading. Or you might be one of those people who has a very low uncertainty threshold all around, and who has a hard time tolerating any uncertainty at all, in which case trading can be even more challenging.
Why is Uncertainty Intolerance a Problem in Trading?
There is nothing worse in trading than being oblivious to uncertainty; that is not the same thing as having uncertainty tolerance. If you are aware of uncertainty in your trading, that already puts you ahead of most. But if you cannot cope with that awareness, you can start having serious problems. Here are some situations which can develop from uncertainty intolerance:
- Despite having tested a trading method for efficacy successfully, you still hesitate to pull the trigger on winning trades. The opportunities slip by you, causing your winning percentage to drop over time. This makes you more nervous, and you start missing more and more chances to win.
- You will feel overly anxious while you are in trades, and you may feel tempted to make bad decisions. You might for example use early closure to get out of trades you should stay in, forfeiting part of your profits. Over time, this can work against you and reduce your profit margin.
- You may procrastinate and avoid trading tasks. This could include everything from learning to testing to actually trading live. You may come up with endless excuses not to trade, and adopt a perfectionist attitude. This attitude is convenient when you are looking for ways not to engage. After all, if you never try, you never risk failure. Of course, you are already failing by default, but since that failure is certain, you never have to deal with the complications brought on by hope.
- You may seek excessive reassurance from other traders, or even friends and family members about your trading. Instead of building up your own self-confidence, you may continue to lean on others. You may treat your trading coach like a crutch instead of a mentor. This can also tax your relationships.
- You may find yourself easily distracted. Distraction is another form of avoidance. If you are constantly caught up in other obligations and necessities, you can use that as an excuse to avoid trading binary options. You may not see it that way at the time, and will probably be unconscious of what you are doing. Inventing obstacles is a great way to avoid engaging.
- You may come up with elaborate to-do lists that you never actually complete. Every time you start coming closer to the end of a list (and some task like trading live), you come up with a new list of items that need to be done first.
Do any of these behaviors sound familiar to you? Maybe you recognize some of your own habits here, especially if you have a tendency toward anxiety and high stress in the rest of your life. People with uncertainty tolerance often sabotage their own success.
If you suffer from uncertainty tolerance, it is easy to feel like you are at the mercy of the fates. And for that reason, you may feel helpless to do anything about your low tolerance threshold. But uncertainty intolerance can be modified, like many other thoughts and behaviors. You cannot do that by eliminating uncertainty, because that is impossible (that is the trap that keeps uncertainty tolerance going). But you can start reducing your intolerance methodically through CBT.
How do you do it? Start by making a list of trading behaviors and behaviors in the rest of your life that are connected to uncertainty tolerance. Rank them with the highest-anxiety behaviors at the top and the lowest-anxiety behaviors at the bottom. Your list might look a bit like this:
- “I find endless reasons not to trade at all, and may even avoid looking at all binary options related materials for days on end.
- “I sit down to trade, but forego trades that I would have taken while testing, because I am scared of losing them, and real money is on the line.”
- “I get out of trades early that I should remain in until the end.”
- “I make a lot of lists. This is a behavior I do with binary options tasks as well as other life tasks.”
- “I excessively seek reassurance by asking people to double-check all my trade set-ups or assure me that I will become successful.”
Start eliminating the behaviors on your list, starting at the bottom and working your way up. When you behave “as if” you are doing better, you start teaching your body and mind new habits, and you may also start seeing positive results you have been denying yourself through self-sabotage. This can lead to positive changes in your thoughts, emotions, and perceptions. Try asking other people if they notice any behaviors you may have missed, and add those to your list if you recognize them as well.
Also learn how to recognize your unhealthy assumptions about risk and uncertainty, and gently correct those assumptions. Some assumptions that may be driving your intolerance could include:
- “When real money is on the line, I am more likely to lose, because I am just unlucky with financial matters.”
- “I lost money in the past, so I will lose money now” (which makes no sense, if circumstances have changed).
- “I cannot trade unless everything is absolutely perfect.”
The key is to question these assumptions and look for their irrational basis. You could address the three assumptions above like this:
- “I am not more likely to lose just because real money is on the line. It is natural to feel anxious with financial matters, but it is superstitious to think that I am cursed.”
- “I lost money in the past because my strategies were poor and I had bad habits. I have corrected both, and my test results are great, so I am likely to win. Things have changed for the better.”
- “Things do not have to be perfect to trade, and they never will be. If they are close to ideal, that is good enough.”
Write down the poor assumptions as well as the corrections, and read them regularly. Keep them somewhere you will see them often, like in your trading plan. Over time, review them to see if your feelings have changed.
One final step that is very important is to write down the outcomes of your exercises. The results are important, and if you do not take the time to look at them closely, you may not notice your own progress. Ask yourself if things turned out all right despite your uncertainty, and check to see if your win percentage has increased since you started forcing yourself to pull the trigger and stay in your trades. Also analyze how you are handling your trading losses, and whether you are better at coping with losses than you may have given yourself credit for.
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It will be challenging at first, but the more of a push you make, the more momentum you will build. Eventually, your healthier new habits will become ingrained, and you will start to become more tolerant of uncertainty. As you watch your trading results improve, you will build confidence, and finally be able to move forward in your binary options journey.