Complacency

Here’s something that happens after you’ve been trading for a long while—you become complacent. Could be you use the same risk limits. You have a system, you risk 1% per trade, and up it to 3% if you are feeling the trade, maybe bigger, but even if your spirit is pure conviction, and you are pretty sure you are right, you don’t bet big enough. After all, the conventional wisdom is that risk limits are very important, and it’s true. You feel you could bet a little bigger, but you don’t. Then, the trade goes much better than you thought and you are quite happy, but there’s a sinking feeling somewhere in there: what would have happened if you had bet as big as you had wanted?

Could be you have a rigorous process for finding your trades but then you find a trade idea somewhere outside your process. You do a bit of leg work and it makes sense, but it’s still early and the market hasn’t caught on so all the sentiment and technicals you like to look at don’t yet align. You decide to wait. As you wait, the market moves in your direction. I have a quick story to illustrate. On election night, I was expecting Kamala to win emphatically, but I didn’t have any trades on because I thought that at some point, the early results would show that Trump had a chance and the market would move aggressively to reflect that. I planned to wait until that happened, or until Kamala was firmly in the lead, or after the fact when the market had moved and retraced to put something on. I slept two hours that night—the very two hours when the market moved lower as Trump took the lead. When I woke up and looked at the results and projections, I lost confidence in a Kamala win. It was time to reassess. However, I found myself wondering why I hadn’t put on a small position on the idea that the market would worry about a Trump win. It was the only thing I was quite confident about that night.

Even if you have an established process, following it religiously is a form of complacency. New traders like to stick to a few assets, and that is what is recommended. But even after trading long enough they rarely venture out into new markets/assets. You find people who only trade vol, or only the S&P 500, or futures. There’s nothing wrong with that, but if you never look into new stuff, you have a limited opportunity set and when your thing isn’t moving much, you will miss out on the opportunities elsewhere.

The thing is, taking risks is always anxiety-inducing, and venturing out increases that anxiety so complacency is how we mitigate that anxiety. I once had a long-term client for analytics gigs who operated the same way all the time. He had things he liked to do around any project. For more than two years, we had the same calls, the same emails, the same texts, no matter how small the project was. After about two years of working together, it started to get on my nerves. I had to overthink his work and it affected anything else I was doing because I tend to absorb the anxiety of those I work with. If a project was small, but there was much ado about it, I approach it with a lot of anxiety which means it took more effort than it needed to. Then I’m not as happy to do the work as I would have been without the extra ado.

Complacency puts you in a situation where any change increases anxiety, and the mind hates anxiety. So one day you put on 2% instead of 1% because you think the idea is good enough for 1% but not quite good for 3% but then you are more nervous than if you had on either 1 or 3 percent.

Complacency also makes it hard for you to be nimble. When I was new to trading, I used to whiff out of trades all the time. I would put it on, the market would dilly dally or move against me a bit, and I would take it off, and then it would rally in my direction. So I decided that one thing I would be big on is never touching my trades after I put them on. I’d wait for my take profit or stop loss. Then I had a new problem. Sometimes, I’d have a trade on, and it would start going my way, or just stay there, but at some point, I’d change my view but I would have a hard time changing direction, so I’d let it run only to watch it take me out.

The problem with complacency is that it is very hard to spot when it is about you. Things need to be really bad before you change, so as long as things are fine, you won’t change. Oftentimes, an external factor forces you to reassess. That’s what’s so nefarious about it. It’s like having a health problem but feeling fine; you won’t do what you need to do to get better.

As you grow older, you develop certain habits and ways of thinking, and changing things up becomes harder and harder, even if you know the change would be good for you. I see it happen with money the most. People often have a few ways of making money they rotate around over their entire life. If they lose their job, for example, they don’t think of new things to do, but in their anxiety over where to get money in the future, they resort to one of their earlier methods. It soothes their anxiety. What they could have done instead is think of new ways too, and do the leg work to see how viable the new options are. Then, armed with a wider scope, make the best choice.

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The solution to complacency in trading is to borrow from intelligence analysts. In intelligence, truth is supreme. There are procedures and you have to be disciplined about them or you lose your job. But in executing your tasks, the supreme objective is to pursue the truth. In movies, the rogue detective or intelligence operative often gets the job done and we love that because if you are ever in trouble, you want the guy who tosses aside the rules so they can save you.

Say you are an intelligence analyst and you guys are trying to assassinate an op in a foreign land. Your job is to keep tabs on the guy, study him, and inform the guys in the field so they can plan the attack. Not everything is clear-cut, and sometimes you have to make predictions about how the guy thinks, what he would do in certain situations, what you think something is, et cetera. You need to get inside his head, and you need to think outside the box.

It’s easy to get inside someone’s head if you like them, that’s how you get someone to fall in love with you. You figure them out and use that information to win them over. But in this case, you know what the bastard did to deserve a bullet, so you hate him. You vilify him, therefore you have a bias. What you need to do is apply cold empathy. Despite hating him and wanting him dead, you put all that aside and you enter his spirit. You begin to see that besides all the evil shit he does, he isn’t faking it when he plays with his kids or kisses his wife in all those surveillance videos. You notice that family and loyalty matter to him, and in your report, you note that if the situation came up when you had to interrogate him, and he wasn’t talking, you could say that such-and-such a person had betrayed him, or you were going to go after such-and-such other person. A very important thing to do is scratch beneath the surface. Maybe he likes to act a certain way around his underlings, but you think it is a facade. The better a read you get, the better your analysis and the more the likelihood for success.

You need to do something similar in your analyses. Put your view aside; don’t be too attached, no matter how strongly you feel about it. Keep a fresh eye to the best of your ability. Same thing with your strategy or your process. In markets, there are so many ways to make money. Your strategy is nice, but it isn’t the only way or the best way to make money. What you need to do, and this applies to life in general, is to stop relying so much on your tools, and rely more on your mind. In business, the advice is to be fixed about your goals, but flexible on the details. Avoid complacency at all costs. This kind of fluid thinking will allow you to think up alternative hypotheses as it reduces your bias.

Overcoming complacency is difficult, but it is necessary. In trading, complacency leads to a similar form of false confidence. You mistakenly believe that your way of doing things leads to success, so it comes as a shock when you are doing everything right and not getting the results you expected. For example, you might believe that the amount of research you do guarantees success. But trading is a thinking game, and in anything that involves thinking, the goal is quality. Sometimes you get a flash of insight and extra ado takes away from it.

The problem with trading is that there are many exceptions to the rules, the conventional wisdom. It is said that the noob knows the rules and the master knows the exceptions. This isn’t an easy post to write because what if someone reads this, becomes a bit lax on their established process, and then faces more or bigger losses? That’s one reason it’s hard to write a trading book—some of the wisdom can sound counterintuitive. I used to avoid trades I got from anywhere other than my process. To my mind, if you got the idea from somewhere else, you inherited their bias so even if you did your own research, you were already biased. Then I came across the advice to invest and then investigate. If you like the idea, put on a small position, then go and do all the leg work, and if you still like it, add to it, if you don’t, scrap it. It helped. I’m not recommending that you change things up for the sake of it, but to look into the ways in which you are complacent, and then work on overcoming them. If you keep coming back to the same ways after you do this, you will know that you are not just automatically falling back on your usual ways. Be vigilant, and remain fluid in your thinking.

Audien’s mantra is energy + emotion and his music truly reflects that. It packs and extra punch. He once did a DnB sounding tune and it best reflects his mantra.