When Being Right is the Wrong Focus

Volatility has a lot of side effects on the mentality of a basis trader. Maybe the most dangerous is an aversion to being wrong – and when price, basis, and spreads change at breakneck speed there are LOTS of ways to feel like you were wrong.

You quote a price to a grower and by the time you get a hedge entered the price is several cents lower – or you hedge and minutes later the market is several cents higher. You make a good basis sale and the next day the buyer is paying 10¢ more – or you don’t sell and the bid drops 20¢. You set a spread and the next time you look you wish you had waited – or you don’t set a spread and the next time you look you wish desperately that you had.

These scenarios happen in quieter times too, but when things are moving around like they have been this year it can start to feel like every action is the wrong action. When you start to focus on that feeling of being wrong, you are at risk of turning simple transactions into complicated ones (picking “hedge points” instead of getting in balance, burying yourself in spread charts, passing up great margins to chase slightly better ones). Here’s the problem – all of that is happening in a volatile, unpredictable environment too, only now your attention to the important stuff is even more diluted by analysis and emotion.

This small picture obsession is best combated by refocusing on the big picture. Step back, detach from the present chaos, take a deep breath, and think about the overall mission. In the grain business, that is to pay a fair value to the people you buy from, sell a fair value to people you sell to, provide good service to both parties, connect your basis transactions with spreads in a way that preserves your margins, manage cash flow, and preserve working capital. This mission is best served not by being right about every transaction, but by being right about the big picture. Focusing on the big mission will allow you to keep it simple and successful in every market environment.