Judging Intuition’s Place
I got an email from a student this week asking about using intuition in trading. He gave an example where using intuition worked in his favor (by keeping him out of trade that signaled then lost), but then wondered if that is really a good idea.
One of the reasons I recommend SO much backtesting is because of the intrinsic learning that goes on while one is testing. (Stay with me here…it is relevant, I promise).
Intrinsic learning is the deeper level learning that happens without our even knowing it. Take any profession, any field, and the person who has been doing it longer will almost always outshine the person who just studied all of the latest and greatest information. That isn’t simply because of longevity in the field, it is because over the course of the masters’ time learning s/he has been subconsciously and unconsciously picking up tidbits, details, tiny little indicators and clues along the way that they couldn’t actually teach to someone even if they tried. The lessons are too deep and often there aren’t even words to describe what the expert knows… it is just that they know it.
This is the level of expertise where people begin to describe the expert as a sage, “He just intuits the [insert situation].” Is it true intuition as we often think of it? Maybe s/he’s really reaching into the ether and extrapolating answers. Maybe s/he’s just calling upon the deeper understanding that has developed over time. Maybe s/he’s doing a little of both.
That is wonderful theory, but it doesn’t really answer the question that was asked, “Should intuition be used in a trade or should rules be strictly adhered to?”
A beginner should always just follow the rules because you have to start somewhere. After a while it is inevitable that the experience that has been built will start to speak to you and it can be a difficult leap to go from the structural experience of the system to the life experience of actually trading.
Here’s what I recommend:
Keep a good record of those trades where you’ve knowingly incorporated your intuition. The trades you skipped and the trades that you took should all be recorded. At the end of a trading cycle (day/week/month – whatever a cycle is for your timeframe) review those trades and see if they’re working to enhance your system or destroy it. If they’re improving what you do, you can rest a little easier and trust your instincts a little more. If they’re depleting your account, go back to your structure for a bit and when (not if) you start to feel intuition come back into play start keeping track again.
The caveat to this is that a certain amount of intuition will come into your trading over time whether you’re conscious of it or not. However, if you are noticing something other than your rules sneak into your trading, don’t disregard it entirely. Entertain it, give it a chance, it could be introducing itself for a reason and might go a long way toward improving your trading as well as your belief system about your ability to trade well.
What do you think?
Next week: Part 2 – Is it Intuition or Emotion?
Triffany Hammond helps traders of all levels, gain the tools, resources and guidance necessary to build on their strengths and work around their weaknesses so that they can make the best possible decisions for themselves in the Forex Market. Triffany is a regular speaker and contributor at 
Hmmm how did I know you were gonna write about this subject …
Every business can be described in a few easy lessons, the skills are in the details, those are what you gain from intuition, other people call it intuition, I call it being aware of those details that are hidden from the bigger picture …. if you are using your “intuition” and its not working thats cos you haven’t yet picked up enough details …
Yaqui … We’ll meet at dawn … 20 paces … and turn
LOL…because I said I would in yesterday’s WLW?! You’re good with subtlety.
I think that’s a great take on ‘intuitive trading’ – the fact that it may be an acummulation of all knowledge operating at the subconscious level. Maybe an extreme form of Unconscious Competence.
Here’s an excellent read by MIke Norman from the Motley Fool, abridged for space. This is intuition at a whole new level. How do you explain this … ?
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In his classic book Reminiscences of a Stock Operator, Edwin Lefevre’s protagonist, Larry Livingston, makes his first great killing in the stock market as a result of what he calls “gut feeling,” or intuition.
(For the sake of simplicity, I’ll call Larry Livingston Jesse Livermore, for that is supposed to be the real-life speculator that Lefevre modeled his character on.)
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. Mind you, he had been out of stocks at the time and was just there to enjoy a well-deserved rest.
The market was climbing on heavy volume, and the Dow was up several points (back in those days, several points was a big deal). Livermore shot a glance over to the quotation board when his eye suddenly caught Union Pacific. The stock was rallying, which was no surprise because it was a market bellwether — the most bullish name in a roaring bull market. Union Pacific was deemed impervious.
Suddenly, without hesitation, Livermore picked up a ticket and wrote out an order to sell 1,000 shares of Union Pacific 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?” Livermore shot back a puzzled glance.
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.
He picked up another order ticket and wrote out instructions to sell another 2,000 shares short. His friend stared at him with a look of frozen incredulity and simply said, “It’s your funeral.”
At that point, Livermore felt that he had sold enough and decided to go to lunch. When he was finished, he went back to the brokerage office only to see that the price of Union Pacific had climbed HIGHER since his last sale. His friend shook his head and mocked with glee, “You see, I told you so.”
Livermore was unconcerned. He was heavily short the most bullish stock in a bull market, but for some reason, he felt strangely calm and at ease.
The next day, Union Pacific backed off a little, and Livermore sold 2,000 more shares short. That night, he cut his vacation short and returned to New York in order to be “Johnny on the Spot” in case something happened.
The next day came news of the great San Francisco earthquake. The entire city had been leveled and was engulfed in a raging conflagration. The tracks of Union Pacific, which were heavily spread around the area, were ripped apart …
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.
I do think that this happens sometimes and I wish there was some way to document and quantify it. Because while this made it into someone’s book, how many other intuited trades didn’t? And I’d like to see whether or not the majority of gut-feeling trades were winners vs losers.
LOL Aby, I hear ya, showdown at the OK Corral…. I want more of this!!!
These discussions are what I feel will really move us to the next level.
Was eagerly anticipating this continuation piece and your thoughts Triffany, thankyou.
And it’s much simpler than I’d thought, the process, a nice intro.
Re: Hutch’s Livermore excerpt, I think that’s a higher level of intuition than most have access to and indeed truly comprehend. Touching on the esoteric, I have no doubt there are realms of awareness beyond 5-sensory perception. Alot of us have everyday intuitive experiences, I know I have (eg. sensing who is calling you before you answer), which are just the tip of the iceberg. But as it relates to trading, nothing on the spider senses for me I’m afraid.
PS. Have just struck G-O-L-D. If anyone’s even remotely interested in Trading and Intuition, ya gotta pick up a copy of Curtis Faith’s “Trading from your Gut” (Turtle trader). Talks about exactly what we’re discussing here and more, including Hutch’s blurb!! Will speed read it in time for Part 2′s article… Fascinating, fascinating!!
Yaqui … That phone intuition thing is no way intuitive, there are usually only 4 or 5 people you have that call you regularly (if that) out of those only 1 or 2 have a present issue, so its really kind of a 50/50 guess not intuition. And if you wanna tell me that you predicted a guy calling who hasn’t called you in a long time, thats cos your brain has worked out a schedule for his calls eg 1 in 6 months, so that call becomes expected …
What i’m saying is that the brain is very good at scheduling, if something creates a pattern the brain has a remakable capability in mapping that out, hence a lot of these IQ tests are based on continuing a pattern (as in whats the next number in this series etc …) this actually makes trading easy and hard, at the beginning the brain see’s everything as unpatterned, so has no idea where to go, hence your ability, Yaqui, to easily predict the caller eventhough according to you it could be 1 out of 100 people in your phonebook, yet to simply predict an up and down move, which is a 1 in 2 chance, you are stuck … what we do is invent parameters or systems whereby the brain can start mapping out the movement of the market in relationship to other factors, this creates a pattern, a schedule, which the brain learns and like 1 3 5 7 9 11 … ? the brain knows the next move of the market …
Thats all there is to know in a nutshell, the other stuff is either irrelevant or wrong, otherwise all psychics wouldnt be conning us they would be down at the tracks making real money !!!
I really like where you’re going with your 2nd paragraph… yes, the human mind is a meaning making machine (Viktor Frankl was right). We like to put an order and structure to everything around us. As it relates to the market, I guess until we put some kind of framework around it (eg. candlestick patterns) does it start to make sense. But this is just the ‘survival’ stage, and these *basic* elements initially only allow us quick recognition, like a fight or flight response… is it safe to enter or not?
Aby, is this what you meant when you said ‘this is what makes trading easy and hard’ – that mere pattern recognition is only 1 tiny piece of the puzzle?
What do you think comes next??
And just for fun, POP QUIZ: What makes a pattern in the market and more importantly why do they repeat?
Incidentally, Curtis Faith talks about a need for understanding market structure/framework before intuition can come in… Did I mention this was fascinating reading?
PS. Did you know that there is actually a Pattern Recognition Theory of Humour?! Seriously, no joke! ;D
It is a funny thing that we’ve taken the conversation to this depth because we are clearly flirting with the more ethereal realm when we begin to talk about being able to psychically predict the markets.
I personally believe that we do have the ability to tap into the ether and find answers to past, present and future. I see it as a collective consciousness, one that we all contribute to and pull from both wittingly and unwittingly. While I’d LOVE to be able to do that with my trading on purpose it makes sense to me that, like with anything, a willingness to contribute to that larger community through practice and presence is what will ultimately tap me into it and help me abandon the part of my brain that over-thinks everything (even trading) and meld with the part of my brain that just knows.
What I personally believe is, of course, irrelevant however because ultimately we must stay in practice long enough to develop any strong sense of trading anyway – I guess what I’m saying is that it is a happy medium (for me) to be able to look at the practice of trading as my ‘now’ assignment and appreciate the insights that come from that regardless of whether or not they actually make me psychic about the market, because they’re still bound to make me a better trader. The rest will just be gravy.
Interesting isn’t it, I have very similar beliefs re: a collective conscious.
I think we’re gradually evolving to balance our intellect with our intuition, learning to use all of our brain… give it another few thousand, million years…
It seems that balancing the two would be a fantastic next step (and a likely one) in human evolution. I like the idea that we could learn, as a species, to tap into something deeper and more meaningful than just our individual selves to accomplish great things.
The easy and hard that I mentioned Yaqui, is the next stage, patterns, are simple and also complex, a child can look at 2 shapes such as 2 triangles and say they both look the same as he points out that they both have 3 sides, the adult may say that the similarities are more complex, the angles are the same, the lengths of the sides are the same, they are both symmetrical about the same number of axis, they have the same area etc etc, now it becomes complex, because now if I show the adult a different triangle with a small change, the child may still think its the same, but the adult has spotted that 1 of those factors is now different, and this is where what some people call “intuition” works, the more complex the vision is, the more a slight change in the pattern can tell an expert trader that this trade is not the same while us “children” still think its the same.
… but of course sometimes as we learn to start seeing more and more patterns within patterns, our minds start to get confused to the point that we begin to doubt are own “childlike” judgments that we should have followed in the first place. It is this period that often creates the learning curve. First we trade well, some people call this “beginners luck”, in fact what it is, is that the person sees the very simple “childlike” pattern and trades off that, that simplicity can sometimes be true and hence he wins. The next stage is that of the mid-loser stage, this is when we start to learn the complex patterns but haven’t yet deciphered which or how we are supposed to follow them, as one tells one story and another the opposite, this is why the mid-stage always loses. The last of course is when the brain finally “cracks the code” and discerns major patterns from minor patterns etc etc …
That was what I said earlier after you crack open the nut shell and spread everything out on one long bit of paper.
[By the way, this might all sound like I am one of those scientific people who thinks everything has a clear logical explanation to it, in fact the opposite is true, its just that I think that the true higher levels of intuition, are not the ones we so easily attribute to our own and don’t necessarily include psychics and a whole load of other garbage either].
Thanks Aby, I like your explanation and your take on the stages.
Life’s all about making finer and finer distinctions isn’t it.
Your last paragraph prompts me to ask: What does everyone think – is Trading an Art or a Science? (I believe both).
Definitely both. What I like about trading is that it starts out as a science and evolves into an art. It really does have the ability to use both sides of the brain. Once we can understand the motivations from both halves we can see the patterns of human behavior (price) much easier. That’s something I know I’m still working on – (and will continue to work on)!