Watch for the Red Mist When Trading

In trading, beware the red mist…

When I used to race formula 1600/2000 cars, I was as competitive as they come. I was too tall and too heavy, but what I competitively lacked in those areas I was going to make up for in sheer determination and skill. Years of trading in the trenches made me understand that every dollar counts… and in racing every second counts.

During one event at the Mont Tremblant track, I channeled my inner ‘Regenmeister’ and managed to qualify solidly on pole position in a pretty heavy rainstorm. In fact, it wasn’t even close – I was on pole by a lot. Confidence was high. No one was going to beat me the next day in the actual race. I slept like a baby.

As Sunday’s race began, I flew off the line cleanly and into the first turn. Easy. I was in the zone. I was hitting my apexes and following all the right lines. I had this race in the bag. I began to picture myself with trophy in hand, signing autographs for all my adoring fans.

But something happened on the way to podium… I relaxed at the wrong moment and suddenly the second-place driver flew by me down the back straightaway.

How did that happen?? I had forgotten he was even there! I had lost myself in the moment, forgetting that there were 10 other drivers trying their best and hoping for me to make a mistake.

I was absolutely steaming… I gunned it and was in hot pursuit of my adversary, matching his every move… but he was good… calm and precise, and seemingly not feeling the pressure of leading the pack. On the next lap I started to push myself a little harder, still pissed that this guy had passed me. I’ll be damned if I’ll let this guy beat me… ME, the Regenmeister! I saw a clean opening to pass… or was it? I could maybe sneak inside on a particularly sharp right turn, but I would need to fly in there fast and try to intimidate him. Unfortunately for me, he had the right of way and I dove in too late. As he turned in I connected with his midsection and spun off the track and stalled. He skidded only slightly from the impact and went on to win the race. My race was over in a heap of humiliation.

I had let the red mist take over. The red mist is a racing term that you might know as “road rage”. In poker, it’s called “going on tilt” – perhaps after you’ve been badly beaten on the river… which you then follow up with sloppy and stupid play, which costs you money. In racing it signifies losing your cool, the point at which logic flies out the window and pure lizard-brain reactivity takes over.

It's something you can’t let happen in your trading. Ever. To this day in trading, this event helps me to remember that moment of weakness. I’ve learned from it.

You can feel the red mist coming… you’ve just taken a bad beat in the market. Perhaps you’ve got a short put with a few days left and some news comes out and the stock plunges through your strike by a lot.

What does the red mist look like? You’re seeing red and you want to get even! It’s not fair! You want to make it all back in one trade. You’re looking to teach that stock a lesson! You’re willing to throw your trading and risk management plan out the window in order to put on a trade that you’d perhaps otherwise pass on… this is the moment you need to recognize the red mist. You’re on tilt. It’s time to take a walk and get your head screwed on straight before putting on another trade.

When things are going well this game seems easy. It’s when the going gets tough that we need to dig deep and control our emotions and behavior. It’s in those moments, when we stare into the abyss, that we find out what kind of trader we really are.

Don’t let the red mist ruin your day.