The “sixth sense” : Intuition and Trading

It is extremely interesting to analyze the way in which new and older trades behave and the big differences in results they have. When you take a new trader and a trader with a 15 year experience and you tell them to make trades based on “intuition” or “gut feeling” the new trader will quickly lose his or her money while the experienced trader will either brake even or make a significant amount of profit. What is so different between the “gut feeling” of an experienced trader and an inexperienced one ? What is the role of “intuition” in trading and how can it lead to the taking of successful positions ? On today’s post I will try to answer this question, the difference between the instincts of a new and an experienced trader and how the development of instinct in trading leads to the perfection of a tool which can prove to be important for success (especially when trading in a discretionary manner).

What is instinct (for the purposes of this article) ? In simple words, it is a sense which creates a sensation within a person that something needs to be done even though a rational process leading to this decision has not been formally created. It is a “gut feeling” that tells you to do something even though you ignore the reasons why you should follow this advice. Instinct simply creates a feeling of uneasiness that compels you to carry out a certain action.

In order to understand the big difference between the instincts of a trained and an untrained trader we first need to understand the difference between educated and uneducated instincts. When a person has been doing any type of activity for long periods of time the brain develops a very intricate set of abilities which allow it to process large amounts of  information in a subconscious manner and give you a “hint” of how you should take action. This type of instinct – which has been shown to save lives in areas like fire fighting – is what I would like to call “educated instinct”, it is an instinct that has been created by the brain to help you survive in situations where it has been previously trained successfully.

Untrained or uneducated instinct is the other side of the coin. This happens when you have a “gut feeling” in an area you have no experience in because your brain is tricked by its similarity with previous situations. For example when you trade for the first times your brain may mistake this sensation with your experience when gambling (like when you buy a lottery ticket) and it will use instincts it has created for those sort of situations. What you get is that you start to make very bad decisions because your “uneducated instincts” simply have no power in this new field.

The problem here with trading is that the education of instincts is difficult since they contradict previously developed instincts you may have from other areas of your life. This is why the instinct of new traders is tremendously destructive as it doesn’t have any “trading education” and it will simply destroy a live account because it will not work in favor of the trader. Experienced traders – on the other hand- have a set of  “trained instincts” that have been developed under successful trading conditions. When a person spends many years – often decades- trading the markets an “educated instinct” develops which can help the trader make the right decisions as it is an unconscious, yet educated part of its brain telling him or her to act in a certain way. While the instincts of a new trader might tell him or her to risk all their capital, the experienced trader may feel that the market is too risky and might prefer to stay on the sidelines or risk just a very small amount of money. The fact that new and experienced trader instincts are often contradictory seem to show this to some extent.

Obviously the “facts” I am pointing out here are based merely on anecdotal evidence, gathered without any actual scientific rigor and an adequate study of the “instincts” of new and experienced traders might be necessary to assess the extent in which this actually develops. However it is true that in many other areas of knowledge and skill, instinct has proved to be an invaluable tool for those involved in them. This instinct seems to be developed as a cause of experience, becoming an extremely valuable an “unconscious tool” that can guide an experienced trader away from dangerous situations simply by creating a feeling of uneasiness that compels the trader to act a certain way. What do you think about this fact ? Do you think there is a difference between the instinct of new and experienced traders ? Feel free to leave a comment below !

If you would like to learn more about mechanical trading system development and how you can develop automated trading strategies using sound trading tactics please consider joining Asirikuy.com, a website filled with educational videos, trading systems, development and a sound, honest and transparent approach to automated trading in general. I hope you enjoyed this article! :o)

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4 Responses to “The “sixth sense” : Intuition and Trading”

  1. Daniel-

    Good post and its definitely an interesting distinction between intuition and just good judgements that come from many years of trading.

    I would say the place to draw the line is here:

    If a trader can explain the reasons for what they are doing – then its clearly not intuition and its the result of judgement and experience. That’s why I think a mentor is key to really get good at trading. When you have to explain what you are doing to someone else, it forces you to be much better.

    Also, good posts earlier in the week about whether trading is more art or more science. My immediate answer was Art and I think anyone who trades manually is practicing and art. Practicing as in medicine because you’re never fully sure of what’s going on or what’s going to happen next.

    But after further reflection, trading Experts on Meta-Trader is all science. And you are doing more than any other person I know to improve the science. You could be making serious money working at the research department of a bank or large forex broker. Fortunately, you are working for us for much less! I appreciate that and I hope you keep it up.

    Thanks,

    Chris

  2. admin says:

    Hi Chris,

    Thank you very much for your comment :o) However I think that you misunderstood my point a little bit. What I wanted to say is that both new and experienced traders have “gut feelings”, instincts that are NOT a consequence of any rational analysis of the market but those of experienced traders are successful while those of new traders tend to fail.

    Obviously new and experienced traders have different levels of understanding about the market but their instincts are also very different. The “gut feeling” of experienced traders (which is simply a “feeling” NOT related to their actual conscious rational analysis) ends up in profitable outcomes while that of new traders makes them wipe accounts. The point being that experience develops an inherent “sixth sense” not based on actual rationality around trade analysis.

    Also thanks for commenting on the previous posts :o) The fact here is that trading is not an art, merely because it is not a representation of what is aesthetically beautiful. Discretionary trading – although most times mystified by newer traders – is usually extremely rational and well planned although its description is far more difficult as that of mechanical trading (as rules have flexibility – room for discretion). Medicine is also not an art (again not a representation of aesthetics in any sense). Perhaps what I am trying to say here is that the lack of an ability to describe the skills needed in one field doesn’t make it an art as the definition of what an art is requires it to express beauty through subjective means (nothing to do with either trading or medicine).

    On the other hand, trading with mechanical systems is far easier to describe (reason why I believe you call it a science) but the truth is that there are no fundamental laws or predictive powers which are a fundamental characteristic of sciences such as Physics or Chemistry. Mechanical trading is therefore simply easier to describe from a technical point of view and easier to study using the power of sciences (mathematics and statistics). Well, it’s all semantics :o)

    Also thank you very much for your kind words :o) Trading for a bank or hedge fund has not interested me yet as I love the flexibility of being an independent trader and the absolute gratification of developing systems within the Asirikuy community. Let us hope that I will be able to continue this endeavor for many years to come :o)

    Thanks again for the comment Chris :o)

    Best Regards,

    Daniel

  3. Kailash says:

    Daniel, You have described the value of these “instinct” thoughts very accurately. I am a trader in the futures market with about 3 years experience and have been training myself to be disciplined to follow my trading system religiously but lately I have been getting this “intuitive” feelings of whether I should trade on a particular day, which actually contradicts my own “No trade filter” in my automated strategy.

    And I have seen that if I had followed my “intuition”, I would have avoided a losing day! So I am at a borderline point where I have barely enough experience to start getting valid intuitions but feel that if I follow these “intuitive ” decisions, I am violating my system and losing my discipline.

    Do you have any suggestions on how to harness these intuitions as part of my own strategy?

    Thanks,
    Kailash

    • admin says:

      Hello Kailash,

      Thank you very much for your comment :o) It is definitely hard to include intuition in trading since the quality of your “intuitive thoughts” is hard to tell to begin with. What I would advice you to do is to start doing a parallel trading journal in which you take into account “virtual” intuitive trades. Keep tabs on what you would have done based on your intuition and do so for at least a year’s time. Once you collect enough statistical information on the results of your intuitive trades you will get a better idea of whether or not you’re getting truly “intuitive trades” or merely just “emotional hunches” which are detrimental to trading. The most important thing here is to understand your intuition and look into whether or not it constitutes a true improvements towards the long term results of your trading strategy. It is clear that separating true intuition (which is a beneficial skill obtained from trading experience) from emotional trading (which is terribly detrimental) is very difficult and only testing can tell you which one you’re looking at. I hope this helps you out :o) Thanks again for your comment,

      Best Regards,

      Daniel

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