Tuesday, July 28, 2009

The Importance of Gut Hunches in Trading

As background for this post, I recommend you take a look at this post on the role of somatic markers in trading decisions and this post on the role of intuition in trading.

What cognitive neuroscientists are finding is that emotion--those gut hunches--plays a critically important role in decision making. That is especially true of rapid decision making in the face of risk and uncertainty. A fantastic recent New York Times article captures how gut hunches are crucial in military battle. The article makes clear that the body often senses danger before the mind makes the identification.

One fundamental fact keeps psychologists busy in the world of finance: the emotions associated with performance pressures--that legendary fear and greed that traders and investors know well--are stronger than the emotional cues from our gut hunches. When we are frustrated or overconfident, we unwittingly override the more subtle signals from our body's pattern recognition of danger or opportunity.

An important implication is that experienced traders--like experienced soldiers--generally know more than they know they know. Their implicit knowledge can only be accessed, however, if they are in a receptive state. This is why techniques for enhancing a calm state of focus can be so helpful for trading performance.

All too often, our self-talk submerges our gut hunches. In other words, we talk to ourselves when we should be listening.


SSK said...

GREAT BACK GROUND INFORMATION REGARDING SOMATIC MARKERS AND INTUITION. In the past, when I was regularly making videos of every trade that i was doing, many times upon review, i noticed that i was talking myself out of trades or trade ideas, that I new from implicit knowledge was a correct analysis. There is a fine line between when videos are beneficial and when they can become detrimental. I find that videos done before the market opens and after the market closes, along with text journaling during the trading day helps me to stay in the zone,if done correctly, more so than just video taping everytrade, simply because it is natural to want to speak on the video, and that can be distracting, hence limiting some of the implicit knowledge and creative thinking, along with losing a degree of concentration. Having said that, there are many positives that i have learned watching my videos, but I think if you are going to record your trading, you must be very conscientious as to where your focus is. Agian, it is very easy to talk yourself out of good idea's! keep up the great work, excellent links on your articles for futher study! Best, SSK

Gustavo's Trades said...


Loved your article, specially liked to follow the thread and read past postings with very relevant information.

After been absent for a while, back to translating your great postings.

Here is the Portuguese version:


OKL said...

Nothing to do with the article; just something I observed.

Food for thought; the last time VIX was at 25

a) 170709- INDU 8350, SPX 905;
b) 090908- INDU 11200, SPX 1220,

The first thing that crossed my mind is "Alright Bulls and Bears, place your bets."

Hlaoroo said...

"All too often, our self-talk submerges our gut hunches. In other words, we talk to ourselves when we should be listening."

I try to make an effort to 'coach' myself verbally about what I see going on in the market. Should I not put so much effort into that?