Recovering From a Bad Trade

Everybody makes mistakes…whether it is buying an item at too high a price or crafting an item when the materials would have sold for more, at some point every active trader will slip up. Here are a few strategies and thoughts for recovering from bad trades.

Identifying the Issue

The first, and arguably most important, aspect of fixing a trading mistake is the ability to identify the issue in a timely manner. The faster that you can figure out something’s not going right, the faster you can fix it. Now, you’ve still got to be careful to not jump the gun and go immediately into repair mode just because your target market has dropped a few gold, but there is something to be said for being able to tell when things have just gone south for the long term. And this type of thinking requires essentially two things experience and honesty.

Experience trading in the market in question (and AH trading in general) will give you wisdom to make educated and not just emotional decisions. The basic premise is that you want to be able to tell the difference between a market cycle and a market decline. Further, experience with the item will tell you if the item is likely to recover in the longer term and if the loss you’re seeing is part of a normal cycle or indicative of a long-term deflationary process. If you don’t understand a market fully, observe it casually or trade very lightly until you do. Additionally, understanding the full value chain of the item will greatly enhance your knowledge of an item’s market. Knowing what materials go into making an item will help you better decide on the fair price of that item. Do not go blindly into a complex market- get some knowledge first.

In terms of honesty, you need to apply a good hard look at your own habits and make a few decisions. Are you trading a given item for short or long-term gains? Did you, perhaps, buy this item at a high instead of a low? Are you experienced enough in this item’s market to make a clear judgment call? Further, is the item something that you might get use out of beyond profit? If it is an epic set of armor that might eventually be an upgrade, is it worth it to keep it rather than reposting it over and over and losing the deposit fee or selling at a loss? There are other applications to this sort of honest introspection as well. Is the item still profitable, but perhaps not as profitable as it once was? This is an issue we hear frequently with WoW profiteers complaining about ‘losses’ in the Titansteel market. Upon further investigation, we often find that Titansteel is still profitable, just not as much as it once was. If something is selling for more than the material, and time cost of making it, then it is still profitable. End of story.

Placing Blame

Often, when we make a bad trade, the first inclination is to place blame on someone or something else: “Damned Undercutters!” Stupid Blizzard!!!”Freakin’ Auction House!” All of these are pointless arguments. In fact, one of the things that differentiates a Wall Street professional trader from an at-home amateur is the ability to separate trades from emotions. You won’t ever hear a pro say things like “Man, Microsoft is killing me today,” or “Oil is making me a mint!” No, instead they will say something along the lines of “I am making a killing off of oil today!” which correctly places the responsibility on the trader and their decision-making. In other words, Microsoft didn’t do anything to you. You make the decisions when to buy and sell. You have to be honest and experienced enough to know when, what and how. Educate yourself and get in the right mindset. The natural human tendency is often to blame another for big mistakes. A classic example is blaming your financial advisor for losses. Sure, they said to buy it. Sure, they said the market looked good. But you, not he, bought it. You didn’t do any further research. You didn’t investigate yourself. And, perhaps, you didn’t research your investment advisor himself. No excuses- Don’t be a victim of the markets, trading advisers or auction house idiots. Do your due diligence and you won’t have to place blame on anyone anyway.

One final note on blame. They say that hindsight is 20/20. Unfortunately, in trading we don’t have this luxury. Don’t even bother with excuses like “I made that mistake because my kids were distracting me,” or “I wouldn’t have bought those things if I wasn’t in a rush.” It doesn’t matter. A mistake was made and you have to press on. If you weren’t in the right mindset then learn from the mistake and don’t repeat it. Or, apply some of that honest introspection we mention above beforehand, and then you might know better than to make those trades to begin with anyway.

In short, it is nobody’s fault but your own so why bother with placing blame at all? Take a step back and treat your new trading session as a fresh start and not an extension of the previous session’s losses.

Why is this Important?

It is important because if you can’t remove your emotion from your trading you’re likely to repeat your mistakes, or even worse, to try to recover based on emotion. If you make a few hundred gold a day, and you’ve just made a mistake that cost you several thousand gold, the emotional reaction is to try to recover those thousands in a single trading session. This is simply unrealistic. As any gambler can tell you, it is much easier to lose money than it is to make it. Remove your emotion to your investment, minimize your losses and move forward. Continue making your few hundred gold a day trades and look for new opportunities. You cannot recover everything at once, and stand to lose even more, if you trade emotionally like that. Emotional traders lack discipline and make inefficient decisions. They are also some of the best people to buy from.

Strategies for Recovery and Minimizing Losses

There are several ways to minimize losses and/or recover. Here, in no particular order, are a few:

Dominate the market- with limited supply items you can attempt to dominate a market by purchasing all of an item and re-posting them all at a higher price. This is, however, a highly risky move and unless the item is in a very limited supply you stand to have many other players re-post more of the same and undercut you thereby increasing your losses. Also, be aware that some players are looking for people that try to dominate the market to take advantage of them. One of our team members loves to do this. Whenever he sees all of an item bought out and repriced, he starts posting more of his own, one at a time, for one silver less than the attempted dominator’s price. The attempted dominator is usually watching closely and will buy out the item to continue his domination effect. At which point our team member will re-post another… over and over until the dominator gives up our team member runs out of item and leaves with a hefty profit.

Thin your losses- another strategy is to continue purchasing the lower priced items at the new lower cost than your initial purchase price. By continuing to buy, you spread out your average cost of the item. For example, say you purchased 10 overpriced items at 100 gold each. The market quickly drops to 80 gold per item. Instead of selling your ten items at the new lower price, you buy 10 more at 80 gold. Now, your average item cost is 90 gold (since unique items have no fixed worth). Now, any that you sell above 90 gold will be profitable. This also helps to increase prices as you’re buying them and decreasing supply while increasing demand. This is a kind of risky move and requires a basic understanding of mathematics.

Diversify- any financial advisor worth his fees will tell you to diversify your portfolio. The same is true in WoW. Be involved in no less than 10 markets (ideally 20 or more) that have little or no correlation with one another. This is not a risky move. In fact, diversification is all about mitigating risk.

Unwind the trade- this is the art of posting counter trades to account for your own losses. It is much less risky than other forms of recovery and is the trading sister of diversification. If you’re well diversified you might be naturally doing this, in fact. An example of a deliberate unwind might be if you take a loss on Ebonweave cloth that you then buy low and sell higher on Frozen Orbs. The idea behind an unwind is that you still come out with a loss on the initial item, but you end up for the day.

Wait it out- are you sure that the market won’t recover long term? Many items return in value some months later. Make sure you’ve got the bank space to wait long term. We have team members that keep items for years just to avoid a loss. Perhaps after the next expansion pack the items you have now that are so low priced due to supply will increase in value significantly?

Strategic liquidation don’t just throw all of your items back into the marketplace at once. Bleed them back into the market strategically to keep the prices high.

Donate- might you donate the item on which you’ve taken a loss to your guild bank, a friend or a new player? Sometimes the loss might be looked at as an investment in good will. Those new players that you help out today may be your best guildmates and fellow raiders at a future point.

Remember that everybody makes mistakes. It is in how we learn, adapt, and ultimately overcome, those mistakes that separates the best from the rest of the pack.

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11 Comments

Filed under WoW Gold Making Tips, WoW Market Commentary

11 responses to “Recovering From a Bad Trade

  1. theerivs

    Great post, I myself made the mistake of speculating incorrectly on my server on Dream Shards. Prices just keep dropping, and the market is still flooded. I’m holding onto my inventory hopefully it will pan out once more content hits where dream shards get more and more scarce.

  2. Wiggin

    Definitely a lot of quality tips here, excellent post about the overall attitude necessary to be a successful auctioneer.

    Icy Dragonscales turned out to be a bust on my server, and chilled meats have been tanking for 3 weeks. What was once 8-10g a stack dropped as low as 50s a stack, only 20s above vendor. I bought about 80 stacks at 2g a piece, before the market hit rock bottom, and can only hope prices will return.

    Anyone else experiencing a drop in the chilled meat department, or have an idea why?

  3. Yorph

    As to the chilled meat, my guess would be the majority has already leveled up their cooking beyond it. Try selling in stacks of 4 when the cooking daily calls for it.

  4. Gil

    First off, this is an excellent post. Lots of good tips, and generally a very interesting read.

    However, in my opinion, there is a small mistake in the “Thin your losses” section where you suggest buying the items at the lowered price to reduce the average price paid per item. The average price you paid per item is of no consequence, the only thing that matters when making decisions such as this is total profit or loss. The decision of purchasing any more of these items should only be decided by the expected return from the future purchases, regardless of you having previously bought the same items for a higher price. If anything, already having a stock of the items should dissuade you from buying more, since you might find yourself overstocked for the market’s needs.

    I will say that this all holds true as long as we assume your continued purchasing is not substantial enough to raise the price of the item back up, since this falls more under the “Dominate the market” section anyway.

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  6. Vyr

    [Unwind the trade- this is the art of posting counter trades to account for your own losses. It is much less risky than other forms of recovery and is the trading sister of diversification. If you’re well diversified you might be naturally doing this, in fact. An example of a deliberate unwind might be if you take a loss on Ebonweave cloth that you then buy low and sell higher on Frozen Orbs. The idea behind an unwind is that you still come out with a loss on the initial item, but you end up for the day.]

    I understand that this post has alot of techniques and terms used in real life stock/commodities/futures/options trading. While reading this, I was thinking you were probably referring to trading and profiting from the efficiencies of 2 similar and linked items. I am not sure where is the correlation between frozen orb and ebonweave. It would be something like, you have bought too much lesser cosmic essences thinking the price will rise. The price fell like crazy but more lesser cosmic essences flood the market. Making buying all of them out a risky option. So you decide to unload a little essences as Lesser, and convert the rest to greater and sell it also. Loss on Lesser, Profits on Greater.

    Or… some even more distant items. Herbs and pots. Eternal Earths with Infinite Dusts. etc

  7. lilliash

    I almost fell into an emotion trap the other day. I was nearing in on 5000g and my epic flying skill. With an epic flying mount in the bank all I needed was the money. Mined like crazy ready for a huge sell off at the weekend. Alas, the market was flooded and my bars didn’t sell at all. I was gutted and seriously considered dumping them all for far less than their worth.

    Then I stopped. Thinking about it there was no reason why I couldn’t re-invest my current 4500G an double it over the next week. Then triple it etc…

    Its well worth remembering that having a large reserve of cash enables u to make a huge amount of gold through trading.

    Patience will make u rich!

  8. With the site owner’s suggestion, I am encouraged to share my thoughts. Jederus has written a very good article here and I was compelled to complement it.

    I focused mainly on the types of bad trades that might occur, and if you feel interested in that particular discussion, you might want to follow the link:

    http://medivhgold.blogspot.com/2009/05/recognizing-bad-trade-and-knowing-what.html

  9. ghphoto

    Bad trades are the sign of a lack of knowledge. On that note I’ve made bad trades for overpriced hard to find items before. 😛

    Check it out. I’m posting a new blog post on the hour, every hour, for a year http://24blogsaday.wordpress.com
    also check out my photoblog http://ghphoto.wordpress.com

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