From Innerworth
No man that does not see visions will ever realize any high hope or undertake any high enterprise.
-Woodrow Wilson
There’s nothing more frustrating than getting caught off guard. When you aren’t ready for an adverse event, you can be thrown off balance. If you are suddenly jolted by an adverse event, you may inadvertently trade impulsively or accidentally make trading errors. Trading patterns that should jump off the chart are not apparent while trading under stress. Well-devised trading plans are abandoned prematurely when your thinking is clouded. We are especially vulnerable to adverse events when we don’t expect them. But there’s a simple antidote: Be prepared.
A multitude of adverse events can thwart our trading plans, especially these days. Trouble in the Middle East can influence oil prices or the economy. A change in foreign policy can make the markets react. But it’s not that simple. Sometimes a newsworthy item persuades the masses to take some sort of action, but sometimes it does not. No one knows with complete certainty what will happen next.
Adverse events are not limited to news events. Unexpected events in your personal life can also shake your confidence. Perhaps the check you sent to the bank for your house payment was lost in the mail. Maybe your son came down with a bad case of the flu. Or your spouse had a bad day at work and kept you up all night complaining about how nothing seems to be going right. You can’t control everything in life. Stuff happens. And when things happen and you are not ready, you may react with extreme frustration or even anger.
You don't have to be a slave to your emotions, however. You don't have to be thrown off balance. Prepare yourself. Many traders work under the false assumption that they are immune to adverse events. They think adverse events should not happen to them. But adverse events happen, plain and simple. The best thing you can do is to change your assumptions about adverse events. You should go into every trading day assuming that an adverse event can happen to you. It's not the adverse event that matters as much as how you look at it. If you believe encountering an adverse event is commonplace and should be expected, you will be less upset when you come across an adverse event. You'll be more likely to think, "It's no big deal. Stuff happens. I'll just stay calm and think of a solution."
Second, plan your trades and trade your plan. When you are thrown off guard by an adverse event, your brain may go into automatic pilot. Without thinking, you may want to react quickly and instinctively, even when it isn't a good idea. Needing to react quickly is only a problem if you don't have a trading plan in place. If you make up a trading plan as you go along, you won't know what to do, and you may make a decision that you'll regret later. But if you have a detailed trading plan to follow, carefully delineated beforehand while in a calm and rational mindset, you can more easily follow it, even when thrown off balance. Trading plans help ensure that you will trade cautiously even when under stress.
Finally, it's always vital to think of as many adverse events as possible and work around them. There are many possible events that can impact prices that you may want to avoid, such as rate hike announcements, earnings statements, or forecasts. Sure, it's possible to profit from announcements, but many times such announcements lead to impulsive reactions by the masses. It may be better to stay away from such events.
The markets are far from certain. No one has a crystal ball, and thus, no one is safe from all adverse events. You can't escape them, but you can take precautions to minimize their impact. By anticipating adverse events, and preparing for them, you can prevent them from impacting your account balance.
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