When optimism is a bad thing

[This text was originally written as a pre-race trading note. Despite my belief that I wasn’t going to get anything from the event, or deserved to get anything out of it, I couldn’t help extracting an insight from it.

Briefly, pre-race trading is about the sometimes fast-paced buying-and-selling of bets in the five to ten minutes prior to mostly British horse races. Some people make hundreds of pounds every day by trading thousands of pounds. My hope at this stage was to make a few dollars every night, which came down to only making a few cents per trade.

I use terms that will mean nothing to most people, but “profit” and “loss” and “didn’t do what I should have done” – like getting out of the market before the race starts – are actually the only ideas that matter.

The optimism part comes in where the pre-race trader sometimes believes it will be okay if he doesn’t exit before the race starts – when prices start jumping around wildly which sometimes ends in your favour, and other times ends with you paying much more than you were hoping for.]


The worst of the $20.99 loss because I didn’t want to hedge for a 3-tick loss pre-race is that I learned nothing from it that I hadn’t already known. I’ve been getting closer and closer to this exact thing happening over the last few weeks. I no longer exited thirty seconds before the start. I was unwilling to exit for a loss if I couldn’t understand why the price was coming in. This was inevitable. I was just lucky that it didn’t happen last week, or the week before that. I should stop everything. End of the road. […] Delete everything. Uninstall the software. Take a few weeks to work out what you’re going to do instead. And what makes it hardest is that things have been going generally well. A $20.99 loss is 175 times my average profit.

(I layed at 6.8 on a tight range a little over two minutes before the race was due to start. The price dropped one tick, two ticks … then it came back. $118 before I could scratch, dipped again, two ticks, three ticks … “Wait for in-play” … Suspend. Nightmare: Within three seconds the price is 4.8 … 4.5 … 4.2 … 3.8 … There’s opposition but the price is still coming in! $10.00 loss … $13.00 loss … agh! … It’s just one mile, and the price is still coming in! He’s just crossed 2.0! Maximum liability is $29.00! Agh! Hedge! Hedge! Hedge! Out at 1.74, and only because he was beaten at the last moment, otherwise my loss would have been almost $30.00.)


What can you say when you burn your fingers for the seventeenth time because you thought it would be okay to take a hot pot from the stove with your bare hands? And you know you weren’t absent-minded. You know you were not in a hurry. Despite having seen how ugly and how painful such burns can be, you took the risk. What can you say?

* * *

Misplaced optimism.

Optimism is usually a good thing, but speculative trading on any market is one example of many where optimism has no place.

More than that, optimism in some situations can be fatal.

A car rolls forward to a 200-metre deep abyss. “I’m sure the car will stop before it gets to the edge” is an example of misplaced optimism – optimism that can cost you your life.

Someone grabs you in a parking lot, throws a bag over your head and pushes you into a car. “It’ll be okay once we arrive somewhere,” your optimism kicks in. When you are tied to a chair an hour later in a dark room and you are slowly tortured to death, you know – you should have kicked and scratched and fought like a possessed cat to get out of that car. Your optimism was misplaced. Your optimism is going to cost you your life.

Fact: there are situations where there is no room for optimism.

Any form of financial trading is a situation where optimism has no place. Before you turn on your computer and make your first transaction, it is of utmost importance to take your cheerful “Optimism rules!” hat off your head and replace it with your black “Pessimism’s where it’s at!” or “I’m a miserable pessimist” or “Pessimists make it to another day” hat.

Remember: Optimism when you trade can cost you 175 times your average profit in one transaction.