Ambiguity is one of those words that to me is both ambiguous and onomatopoetic – in other words, it is easy to be not quite sure what it means and the words itself sounds like being not quite sure what it means. … (Or, at least it does to me given the relatively lousy education I got in high school).

But beyond linguistics and back to the regularly scheduled program of Psychological Capital, why does ambiguity matter – particularly to sophisticated traders?

Ambiguity matters because it is the hallmark of markets. At any point and from any perspective, markets of all types are always ambiguous. They are never ever certain – no matter how many algorithms or sophisticated studies of historical probabilities a trader wraps around them. These techniques lure us into thinking that our results can be certain – i.e. we have a 67% chance of generating X points if we get long or short according to this relationship of these four factors – when in fact we cannot be certain.

How much time will it take? How much “negative drift” will it incur? Just these facts alone mean the possibilities are essentially endless and therefore the question is at its core ambiguous.

But why does THAT matter you say if you have tested your 67% chance and believe in it? Well first because how immutable are your beliefs? Confidence levels (feelings mind you) are variable i.e. creating more ambiguity even if this portion is actually in your psyche versus in your data.

This dilemma if you will is the exact reason that the vast majority of traders lose money. In order to be successful, it is necessary to understand, appreciate and even love the ambiguity. It is also necessary to know what to do with it. And for the latter it helps to know how your brain handles it – which is not as a serially updating computer solving a calculus or even a basic statistics question.

Faced with ambiguity, your brain naturally resorts to filing through unconsciously stored patterns and communicates with you through your feelings as much as your thoughts. Which adds even another challenge to this already daunting mental exercise of taking money from other traders (that is what the game is btw – alas, but for another post).

So… what have you been taught to do with your feelings? Discount or ignore them, right? Now you are in the position of purposely overlooking the very data you need to fully interpret what is going on in front of you – at which point, in this sea of ever-changing ambiguity, you are lost. This is why sometimes seems if you just took the opposite of every trade you would make money. How many traders have said “if I could only use myself as a counter-signal”?

The question is – instead of me lecturing – how do you handle these facts of trading?