Recently I’ve become increasingly fascinated by the idea that intuition, emotion and instinct could be the most reliable tool we have to profit from trading. I’ve read so much over the last 6 months and in almost every case, the one thing I’m constantly told not to do is to let my emotions play any part in my trading. I believe that is the biggest mistake you could ever make.
Since March 2012, I’ve traded about £1500 worth of positions. Right now, as I write this, I’ve got exactly £489 in my IG Index account (I had £500 but I lost £11 in a long position on Sports Direct earlier today).
Anyway, that means I’ve lost £1000.
But I don’t consider it a loss at all.
I’ve spent £1000 to trade for 6 months and during that time, every trade, chart and reason for opening or closing a position has been stored away by my subconscious mind. I believe every consecutive trade I’ve opened, I’ve opened with the knowledge of the previous trade being taken into account – even though I wasn’t aware of it.
As time has passed by, I have noticed my trades getting better; and later in the week I’ll post up October’s results in full to prove it. I believe the longer I continue to trade, the better I will get. What makes this possible? Experience, clearly, but also something else. Something more powerful and, somewhat controversially, emotional.
This secret Jedi force is known as intuition.
Intuition is the result of the way our brains store, process and retrieve information on a subconscious level. It is the psychological manifestation of our brains quickly drawing on past experiences and external cues to make decisions on a non-conscious level. In other words, it happens so fast that we’re not aware that the intuition actually stemmed from a supercharged burst of logical thinking.
Intuition = Logical thinking? Really?
Edward de Bono’s work on how the brain learns and processes information goes some way to supporting this viewpoint, and other pseudoscientific theories postulate that it is the long-term accumulation of ‘logical’, hard-won knowledge that, once acquired, enables the brain to make ‘leaps’ in judgment, bypassing the A,B,C process and jumping straight from A to F.
One of my oft quoted and favourite traders, Jesse Livermore, if the story is true, once made a hugely profitable trade based entirely on intuition.
“In April 1906, Livermore was on vacation in Atlantic City. As luck would have it, one morning, while strolling along the boardwalk with his friend, Livermore came upon a brokerage office. Being naturally curious, he went inside to see how the market was doing. He had been out of stocks at the time and was just there to enjoy a well-deserved rest.
Livermore shot a glance over to the quotation board when his eye suddenly caught Union Pacific (NYSE: UNP). The stock was rallying, which was no surprise because it was a market bellwether — the most bullish name in a roaring bull market. UP was deemed impervious.
Suddenly, without hesitation, Livermore picked up a ticket and wrote out an order to sell 1,000 shares of UP short.
His friend let out a nervous laugh and said to him, “I think you made a mistake. Shouldn’t that have been an order to buy 1,000 shares?”
There was no conscious reason for Jesse Livermore to be selling Union Pacific short. He didn’t know anything about the company that anyone else didn’t know. Its earnings were strong, its outlook bright. Freight and passenger revenues were on the rise. Its capital position was strong. Yet deep within him, there was the feeling that all was not well.
The next day came news of the great San Francisco earthquake. The entire stock market remained strong, giving up only a few points at first and then rebounding. Union Pacific stock just would not go down. His associates urged him to cover.
Sure enough, as the full scope of the disaster became apparent, the market began to slide. At first, it was a measured, orderly retreat without any indication of panic. Then it utterly gave way into the full-fledged crash that Livermore had been expecting. Incredibly, he held off still, deciding instead to double his ante by unleashing wave after wave of selling. The bulls were on the run. On the following day, he covered, making a killing in the process.
Was this luck? Or was it many years of trading and logical hard won knowledge that gave him the edge?
I guess we’ll never really know in this case, but there are still trades happening today where emotion and intuition are the edge and many examples of it exist on the web if you look. The bottom line seems to come back to the idea that traders who have been in the game longer can make snapshot intuitive decisions that often turn out to be correct, whereas new traders use the same intuition to make losing trades.
The conclusion from this is that the hard won knowledge and experience of the older trader has simply given him more logical boundaries from which he draws his intuitive snapshot decisions from.
I believe that if you embrace these feelings of intuition and emotion within a framework of tight risk management and post-trade analysis, you will eventually be able to make snapshot decisions on positions that turn out to be proftable – based entirely on instinct.
I think I’m a better trader now than I was last month and I’ll be posting up my October trading results in the next couple of days so check back for those or follow me on twitter if you want to know when they’re up.
Also, in November I’ll be starting my intuitive trading experiment with my £500 which I want to compound at 20% per month so make sure to favourite this page or bookmark or whatever and come back for that.
In the meantime, happy trading!
- Sato, Rebecca. “Intuition is Not Pseudoscience, Say Researchers.” British Journal of Psychology 6 Mar. 2008: n. pag. Web. 23 Jan. 2011.
- The “sixth sense” : Intuition and Trading
- Should You Trust Your Trading Intuition?
- U.S. Navy Program to Study How Troops Use Intuition
- The Role of Intuition in Trading – Motley Fool