Thursday, February 18, 2010

Building Market Intuition: How Chance Favors Prepared Minds

The recent post focused on how anxiety and frustration can interfere with the subtle cues that provide an intuitive, gut feel for markets. That has led some trading gurus to insist that emotions are the enemy of good trading. Once we understand the nature of intuition, however, we can see that this is not the case. Our feel for markets *is* a kind of feeling; if we were brain damaged and unable to feel, we would not only lose anxiety; we would lose an intuitive sense for markets and the very helpful feelings that keep us out of dangerous situations.

The problem with accessing intuition is not unique to emotion: any strong set of inputs that cloud our attention to our gut will result in a loss of market feel.

Here are several situations that I have found lead to poor trading because they create a focus on explicit thought rather than a natural feel for markets:

1) Strong Opinions - Once we become anchored to a strong opinion about market direction, we attend to factors that support our view--or we become concerned about factors that aren't lining up with our view. The result is that we're no longer attending to our own feel for markets. Instead we've imposed a view over our gut, trading what we think *should* be happening, instead of what is actually happening.

2) Focus on P/L - When we become unduly concerned over profitability, our attention is directed away from markets and we can no longer register the patterns that evoke our intuitive feel. This can occur both when we're overconfident and trying to juice profitability and when we're worried about losses. Intuition is a function of implicit pattern recognition--and that requires an immersion in markets.

3) Tunnel Vision - Many times, the patterns that evoke our feel for markets are only apparent when we view those markets in unique ways. If we become trapped in a particular market or a particular time frame, we cannot see the patterns that may be occurring across markets or time frames. This often happens to traders who are following the market tick-by-tick: they lose sight of the big picture and never intuit the larger market moves (that eventually run them over).

It is easy to fall into the opposite trap and conclude that *any* explicit thought process is a danger. That, of course, is silly. We cannot achieve an intuitive synthesis of market data unless we're first absorbing and processing the market data. It's the analysis after analysis--observing what is happening across indicators, sectors, markets, and time frames--that leads to the eventual intuitive synthesis and the great trade.

"In the field of observation," Pasteur noted, "chance favors only the prepared mind."

Now we know why.



TraderSmarts said...

Enjoyed this post Dr Brett. Reminds me I was in Barnes and Noble this weekend and perused through "Trading From Your Gut" the new book by Curtis Faith - one of the original turtles.

Being a discretionary trader I am a big believer in using my "gut or intuition" while trading. My intuition has prevented unnecessary losses on more than a few occasions as well as provided opportunities for profit that I would have otherwise been without had I been strictly following a "system".

Would love to see more posts on this topic. Cheers!

tom brakke said...

You always do a marvelous job of writing about anticipation and preparation in your postings.

No matter one's approach to the challenge of investing, thinking about doing is where it all should start.

Soberba Insônia said...

Hi Brett. Let me put this way.

I´d rather have a a nice capacity of reading the charts without distorting them than have this kind of gut feeling setup.

But I know exactly what you are talking about. I have this kind of impression, and, suddenly, it just follows its course properly.

But I dont count on it.

Plus, there are many situations on the markets.

i.e. Sometimes even reading without distorting it, the ocean is so in a such storm of reversing that gut feeling won´t help you at all. But just your capacity of responding as fast as you can for a profit do not turn into a looser.

And this come from practicing and technics, not about gut feeling and all (unless you are associating gut feeling with a clear perception of things)

So, I stick with the charts are showing in our faces.

So, this Pasteur quote - for me- I think is more related to always have a flexible mind. And in our case is to know where the markets offer calm waters and wild ones.

And be aware at all times.

Adam said...

I find that the harder I work, the more luck I seem to have.
~ Thomas Jefferson