As a trader, fund manager and investor over the past 25 years, I’ve made more mistakes than I could care to count. I’ve bought at the highs and sold at the lows so many times at I no longer even shudder at the thought.
My first ever trade with real money, after 6 months of supervised paper trading, was a classic, “I should have done the opposite” trade. It was on the 17th of January 1995. I had studied my charts, defined my risk, set my levels, cleared my head and waited patiently. I was pretty sure that the Yen would strengthen that day. I placed two separate Yen buy orders below the market and to be safe, a stop loss further below my entry points.
Finally being allocated trading limits on a foreign exchange desk was exciting. Having traded pretend money for the previous 6 months and hardly putting a foot wrong, I came to live trading with an expectation that I would shoot the lights out and become a gazillionaire in no time.
It turns out, that my first trade was a fast trade. All I heard from the JPY dealer was, “Dave, you’re done”. My thought was “beauty, I’m set on my first trade”. Then I hear him say again. “Dave, you’re done….. and you’re done”.
I couldn’t quite get my head around what had just occurred, but it turns out that all three of my orders including my stop loss were executed in rapid succession. The Yen hadn’t gone up, instead it sold off in quick time.
I had no idea what had happened. Thinking the dealer must have made a mistake and me, being completely incapable of grasping the reality of being wrong so quickly, barked out a .. “What? Bullshit!” remark, as if complaining to the referee in a footy match.
Moments later, someone called out “earthquake in Japan”, and the reasons for the quick sell-off in the Yen became apparent. It was the Kobe earthquake and as it turned out, my first trade was to buy Yen after it had happened. Genius.
25 years on, I can now look at that trade dispassionately, as it is pretty obvious that as a 23-year-old trader sitting in Sydney, predicting an earthquake in Japan would have been quite a stretch. But it didn’t stop me at the time from beating myself up for losing money on my first trade.
“I shouldn’t have risked so much….Why wasn’t I short Yen instead of long? ….I should have had a tighter stop loss…..If only I wasn’t so eager to put on my first trade.” All these thoughts were clearly lacking perspective, but mostly, they were lacking self-compassion.
So often we get stuck in the idea that we should have perfect knowledge when it’s obvious that when dealing with the future, no one has perfect knowledge. By its nature, the future is unknowable.
After my first trade went so wrong so quickly, how do you think my next trade went? Well, different from my first, but badly nonetheless. Despite having a reasonable process, as green as I was, following my process with all this noise in my head was nigh-on impossible.
My loss from the day before caused me to be cautious when boldness was required. With markets trading with increased volatility courtesy of the Kobe earthquake, there were opportunities aplenty for nimble traders. But instead of seeing opportunity, all I now saw was risk. This led to a period of second guessing and tripping over myself, when the experienced traders around me were making out like bandits. Each time I baulked and missed a trade entry, I went into another frenzy of self-flagellation.
How helpful was this do you think? You guessed it. Not very.
So in the space of a week, I’d gone from aspiring superstar to useless pretender; all in my own mind of course. I’d had an expectation that was completely unfulfilled and now I was in a never-ending cycle of tail-chasing.
So how did I move past this never-ending moment of self-loathing?
Well, there is two answers to this. Over the longer term, it mostly came down to measurement and process. The more data points you have to support your process, the less noisy your inner-critic becomes. You have the data to lean on when getting battered by the winds of uncertainty. You just shut up and trade. This process orientation is worthy of its own article, so we’ll park it here for the time being.
But in the short-term, when we have the need to make decisions in the face of uncertainty, finding capacity to quieten the raging voice of your inner-critic becomes imperative.
If you’re one to constantly beat yourself up, there are ways to train your mind to be a little kinder on yourself. I’ve had to do this a lot over the years and I still do it today using tools from my self-CARE program. By showing myself some compassion, I am less judgmental, not only of self, but of others. This enables me to see things more clearly, rather through a prism of self-recrimination.
Instead of heading straight into self-flagellation, having self-compassion creates a circuit breaker, a moment of pause, to allow me to see things differently. In my mind, this is one of the greatest benefits of quietening the vocal inner-critic.
There has been considerable research on this and it has many other positive benefits. While the term self-compassion can be off-putting for some, all it really means within this research is simply not berating yourself at the first opportunity. People that are more self-compassionate tend to have greater life satisfaction, are more connected socially, have stronger emotional intelligence and in large part, are generally happier and are less likely to exhibit depression, anxiety or burnout (Barnard and Curry, 2011; MacBeth and Gumley, 2012). I can relate to this as when I’m in beating-myself-up mode, the lens through which I view the world is coloured by my negative self-view.
Most of us experience these negative emotions at different times in our lives, but for those that are more self-compassionate, they tend to be more fleeting. Those that are less quick to negatively judge themselves tend to be able to flow with life’s punches a little easier and are more resilient in the face of bad news or negative events (Germer and Neff, 2013). It also reduces the fear of failure (Neff, Hseih and Dejitterat, 2005; Neely et al., 2009). If you’re not beating yourself up all the time, then when you do fail at something, you’re more inclined to have a bit of a giggle, shrug it off, and then get back on with it. This is obviously important for trading and investing generally. So, self-compassion is a pretty healthy tool to add to your trading and investment toolkit. If only I had more of it 25 years ago.
The self-CARE program enables objective decision making by clearing emotional attachments on-demand. For more information, visit https://davidhobart.com/self-care/.
Barnard, L. and Curry, J. (2011). Self-Compassion: Conceptualizations, Correlates, & Interventions. Review of General Psychology, 15(4), pp.289-303.
Germer, C. and Neff, K. (2013). Self-Compassion in Clinical Practice. Journal of Clinical Psychology, 69(8), pp.856-867.
MacBeth, A. and Gumley, A. (2012). Exploring compassion: A meta-analysis of the association between self-compassion and psychopathology. Clinical Psychology Review, 32(6), pp.545-552.
Neff, K., Hsieh, Y. and Dejitterat, K. (2005). Self-compassion, Achievement Goals, and Coping with Academic Failure. Self and Identity, 4(3), pp.263-287.
Neely, M., Schallert, D., Mohammed, S., Roberts, R. and Chen, Y. (2009). Self-kindness when facing stress: The role of self-compassion, goal regulation, and support in college students’ well-being. Motivation and Emotion, 33(1), pp.88-97.