Uncertainty and Certainty


Many people believe that 'uncertainty' in trading is because the market is a complex chaos where trends change frequently and prices fluctuate entirely without rules, managed purely by probability. But this viewpoint is wrong.

In uncertain transactions, what is certain?

Many people think the "uncertainty" of trading refers to the market being a complex chaos, with frequent trend reversals, and price changes that are completely random, dominated purely by probability. However, this understanding is incorrect.

The Definition of Uncertainty

Market uncertainty should be divided into three main aspects: the uncertainty of price direction, the uncertainty of fluctuation timing, and the uncertainty of price range.

  1. Uncertainty of Price Direction

This refers to our inability to accurately predict the future direction of fluctuations, such as in volatility, where we cannot determine where it will break out, or whether a unilateral movement will continue or turn back.

  1. Uncertainty of Fluctuation Timing

For example, when we look at the hourly charts within a day, the euro suddenly shows a breakout K-line, but whether its rising state can continue in the future is uncertain.

The uncertainty of timing refers to the unpredictability of the duration of price movement.

  1. Uncertainty of Price Range

Traders always lack understanding of the magnitude of trends. Sometimes, we think it is a daily trend, but it just fluctuates for an hour and then stabilizes. Other times, we think it will be weak, but it becomes strong on the weekly chart for half a year.

If there's anything particularly challenging in trading, it is estimating the extent of price movements.

For example, a single statement from Marx yesterday caused Bitcoin to fall by 10%, last year's gold and U.S. stocks flash crash, the 2016 U.S. elections and referendums, the 2015 Swiss Franc storm and gold snafu, and I forgot what happened in 2014, the 2013 Cyprus gold sell-off, and so on.

These situations are referred to as "Black Swan" events—extremely rare and extreme circumstances that suddenly occur and have a huge impact on the market.

This leads to market movements deviating from their original trajectory, completely reversing the short-term fluctuation pattern.

We try to understand the market through technical analysis on charts, reasoning with the three main elements (direction, cycle, and magnitude) at hand.

What is Known?

When I open the chart, I look at yesterday's trend, the day before's trend, and base it on this known data. The prediction made inevitably cannot escape the influence of recent historical trends, which means the essence of our inability to predict is due to not knowing what new variable information tomorrow will bring to affect the market.

It's like solving a math problem, (the day before's) 1 + (yesterday's) 1 = (tomorrow's) 2, a reasonable guess. If your calculation differs, obviously it's an illogical guess.

But these unpredictable new impacts have had a tremendous effect on the market and human history, pushing history to develop by leaps and bounds, and naturally, the market also has jump-like rules.

To clarify, if friends are still confused here, consider stepping out of "independent probability" and "local thinking" to understand this issue.

So, what truly is the essence of these three uncertainties?

It describes the market's local movement method as uncertain, not that the market is completely randomly wandering without day or night effect.

What about the future movement trajectory of prices is uncertain? It is because we cannot control the variable of information and thus cannot measure accurately.

But it doesn't mean objective development rules don't exist!

It's like when you squat down to watch ants, seeing one ant moving unpredictably, you can't understand its intention or destination, and so it is when we look at the market.

Facing the market's next minute direction, the magnitude of hours and intra-day, the sudden strong fluctuations and how long they can last, these short-term and local movement trajectories are unpredictable, just like each ant behaves differently.

But what about an ant colony? Its existence obeys certain universal laws, with the division of labor within the species dictating each ant's behavior, though each acts differently, their purpose is the same: to find food and propagate their species.

Thus, we understand that the reason for the unpredictability of local and subtle movement trajectories lies in their intention not being unified and clear.

Then why can the market's macro trends and state of trends be relatively certain?

Because it's like an ant colony, united as a whole, driven by common interests and needs.

Starting from the interests and needs of the major players, the predictability of price behavior improves, because only a few people can benefit in the market, and the development of the trend will always be unfavorable for the majority.

Trading is like playing poker, if after a round you can't identify the loser at the table, then you're likely to be that person yourself.

In one sentence, coincidental outcomes embody inevitability, while the inevitability of rules leads to coincidental results.

So, what is the certainty of the market?

The micro trajectory of prices is uncertain, but it doesn't mean that price fluctuations lack logic. From the example of ants, we learn:

A. The intrinsic motivation of trends is the objective law of change in everything.

B. It's driven by collective human nature in market behavior.

C. It's the cycle of the market's stability and imbalance.

From these three perspectives, let's talk about why single outcomes are uncertain, yet the layered aspects of probability have a high predictability.

  1. The basic law of change in everything is inertia.

The emergence of a trend is when prices break the boundaries of oscillation, and the mode of market fluctuation begins to be dominated by inertia.

For example, the collapse of a dam often starts from a small crack, and the pressure of a large volume of water causes the crack to expand continuously, eventually breaking through the barrier, unleashing a massive flow.

The market always moves in the direction of least resistance, but the focus of many people is on the breakout. As soon as they see a breakout without defining the level, they blindly follow the trend, often facing setbacks later and complaining about the reliability of signals.

In fact, the concept of a breakout isn't just about the price's immediate momentum, but about the "pressure" built up during oscillation. By evaluating the level of oscillation, a trend level definition can be extended.

The main problem for most traders who can't trade trends well is here:

  1. They can see the emergence of a trend, but can't evaluate the level of the trend.
  2. Without being able to evaluate the level of a trend, it's impossible to estimate the potential profit space in the future.
  3. Hence, lacking a concept of the future development of the trend leads to a lack of confidence in holding positions, missing out on profits.

Holding firm to positions is not about enduring ignorance, but about being clear about potential profits. If you know you're holding a hundred, and you clearly see ten thousand lying beneath your feet, would you let go of what you have in hand to pick it up?

  1. Market Behavior Driven by Group Human Nature

In summary, traditional traders mostly make decisions based on price information.

In terms of analysis ability, I think the difference in abilities among traders is not significant, and even in secondary reversals and intra-day fluctuations, many veterans are not as good as novices.

So where's the difference?

It lies in the multi-layered understanding of the main trend movement, as well as the dissection of future development nodes. These judgements about the market's leading trends (direction, level, magnitude) lead to cognitive differences.

Novices struggle to define trend structures, while veterans are good at identifying development nodes within trends.

For instance, novices remember the short-term strong resistance vaguely and do not understand how to interpret the trend's momentum after breaking through strong resistance, only foolishly proclaiming the superiority of following the trend, which is useless.

Veterans, on the other hand, constantly dissect trends, trying to understand local movements in a structured way, thus clarifying entry signal opportunities.

For example, whether oscillation can form a continuation and the breaching of that continuation signifies the emergence of a new structure, then verifying the correctness of trading thoughts with actual trends. In this way, the market isn't uncertain; on the contrary, it's certain for you.

Group expectations, through specific movements, significant psychological nodes, and critical strong resistances, form unity and synergy. If you grasp these nodes, then as I said previously, single probabilities are unpredictable, but on the probability surface, there is strong predictability.

The trading strategies constructed from these elements absolutely have a positive expectation, depending on whether you can execute them on the ground.

  1. The Cyclical Rotation of Market Balance and Imbalance

From a technical perspective, the essence of trend understanding is the transition from balance to imbalance.

For example, oscillation, the premise of oscillation state is price movement around value.

Imagine, the expectations and decisions of all investors create the "value" of that commodity. And as the price moves around value, it inevitably leads to speculative behavior among traders in the market.

"Value consensus" as the anchor for measuring price highs and lows

Some think it's too high after a rise and sell short; others think it's too low after a drop and buy long.

In a state of market balance, prices will fall into oscillation, displayed on the chart as clear boundaries, with prices swinging within the oscillation range.

But the deeper logic is the expectation divergence and speculative behavior of the trading group, buying more when it's low, selling short when it's higher.

In a state of market imbalance, however, balance is broken, and the information acting on price increases over time. As traders, we can only induce from historical trends, unable to predict what new factors will disrupt the balance in the future.

Once balance is broken, traders' expectations are realized in the market. What kind of expectations?

The long-suppressed desire for profit. The market has been oscillating for three months, and trend traders have been waiting for three months. Do you think these three months were meaningless? On the contrary.

Waiting contains hope, and hope represents everyone's will. When everyone's expectations form a tide, any wish can be realized in the trend.

In other words, think about pent-up emotions and needs. .

When market expectations form a tide, traders' views and the current trend create a reinforcing effect.

For example, on the day gold breaks 1800, thinking it could reach 1815 is good, then seeing the price at 1825 the next day thinking it should reach 1845, and upon reaching 1845, expecting 1860.

Traders make decisions based on historical trends, and a clear trend will inevitably breed overly optimistic speculative actions. In this mutual self-reinforcement, a market sentiment slowly emerges that is optimistic/aggressive/extreme.

If you can define and distinguish between optimistic sentiment, aggressive sentiment, and extreme sentiment, then that's a formidable rule advantage.

  1. The Deep Logic Behind the Difference Between Balance and Imbalance

The core of balance is traders' recognition of value, with automatic speculative behavior correcting price deviations in an oscillation environment, whether high or low.

In an imbalanced state, the market lacks correctors, everyone is excited, more excited, and even more excited, and anyone going against the trend is like blocking the train's head.

Thus, the exhaustion and reversal of the trend are often due to the extreme expectations supporting the price slowly returning to rationality, rather than any strong external forces.

From this concept, any attempt to predict tops or bottoms is foolish, and position management becomes a simple matter.

It's about establishing positions when expectations converge, accumulating positions during optimism, reducing positions to lower stubbornness and maintain flexibility during aggression, advancing the clearing line during extremes, until the final reversal of the trend for clearing.

This is also what I often mention, that position management is not about snowballing, but about fitting different wave amplitudes to make adjustments in positions through defining the trend background states, with the underlying logic being to adjust trading expectations according to market sentiment changes.

The essence of a trading system is our decision-making model constructed based on understanding market trends.

For example, the basic laws of price movement I mentioned, when you summarize these specific trend structures using a trading framework to understand the logic behind the trend, naturally market fluctuations are no longer unknown to you, but known.

The majority of trend signals we filter out are not because we don't understand how they move, but because their probability value is too low, and the risk cost is not worth it.

So, certainty or uncertainty is, to some extent, subjective. If we must define it from the perspective of predicting the future, what in this world is certain?

Consider expanding your thinking and ponder over this question: Why are the structures of ant colonies dug out consistent?

Some think it's due to genetic memory, others believe it's influenced by damp environments, and some say it's the intelligence of microbes.

But in my opinion, it's the most efficient architectural structure that suits biological habits, the endpoint of long evolution. There was never any intelligent design, it was just done in the most efficient and energy-saving way possible.

So, what about the market? For us trading ants, what is the most efficient structure constructed? Understanding this question is the key to grasping the secret to stable profits, the endpoint that fits human behavior patterns.

For more questions, please contact CWG's Ahai on WeChat: ahaidanshenkeliao


Risk Warning and Disclaimer

The market carries risks, and investment should be cautious. This article does not constitute personal investment advice and has not taken into account individual users' specific investment goals, financial situations, or needs. Users should consider whether any opinions, viewpoints, or conclusions in this article are suitable for their particular circumstances. Investing based on this is at one's own responsibility.

The End



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