Eventually it’s bound to happen.
The bad trade.
If you’ve traded commodities, (we’ll use ethanol and corn markets as an example) for any length of time, you’ve probably experienced the emotions that come next.
First, regret. Wishing you hadn’t just made that bad trade.
Then, pain. You now have to explain to your boss why you got the trade wrong. That’s no fun.
And finally, probably the most impactful emotion, fear. In particular, a fear of what’s going to happen next.
For most, fear is all about the anticipation of pain. Take a flu shot. You’re called in and sit in a chair watching the nurse prepare the needle, thinking all the while of the upcoming pinch.
Generally, we react more strongly to the anticipation of pain than we do to the actual pain.
Let’s take a scientific approach to this. When you’re fearful, your body enters a state of stress. And when you’re stressed your body sends blood that would normally go to the neo-cortex part of your brain that involves more logical, higher-order thinking, to the limbic system or mammalian part of your brain, which uses emotion to make decisions often demonstrated by fight, flight, and freeze responses (freeze being the proverbial “deer in the headlights”).
In essence, your logical and cognitive abilities are significantly impaired when you’re making decisions after a bad trade. And you become emotional and reactionary—and that’s not a good thing, especially when money is on the line.
Think about the last bad trade you made. How did you react? Did you “freeze up” afterward (even just a bit)? Did you find yourself ignoring the results of the trade? Did you find yourself negotiating with the “market gods” after the trade? These would both be common reactions to a poor trade—and they’re reactions I see regularly.
So, how do you cope with these emotions after a bad trade to better ensure you don’t compound your mistakes, or make the same mistake again?
A few ideas:
1—Recognize what you’re feeling. Simply acknowledging your feelings after the bad trade and accepting it can go a long ways toward making the right decision next, and creating the self-awareness needed to drive better management in the long term.
2—Read TraderMind: Get a Mindful Edge in the Markets by Steve Ward. A great read for any trader, this book discusses the behaviors of high performing traders with practical changes you can make. Even if already pressed for time, you can put yourself in a better place for making a trading decision.
3—Focus more on your performance and less on the results. Focusing on your performance will help you operate strategically – taking a long-term approach to success and reducing the impact of the moment to moment gains and losses. High performance shouldn’t be confused with results. High performers have behaviors in place that deliver consistently over time – that doesn’t mean they don’t make bad calls, but if you’re building a business they’re the ones you want as part of your team. Having a disciplined approach based on established goals and key strategies will give you the support you need when those feelings of pain and fear start to “freeze” you up.
4—Change the frame you operate from. For our example – focus on crush margins vs. specific directional calls. By focusing on crush margin, which ultimately determines the viability of an ethanol operation, you take the game to a higher level. Waiting for a specific move from one piece of that formula can easily distract you from the overall crush goal. By locking in crush margins in advance, you’ll give your brain more opportunities to be “satisfied.” This also puts you in a better position to more strategically take advantage of independent directional moves, by removing overall crush from the formula and putting the independent input to the scrutiny it deserves and limiting risk to the specific opportunity at hand.