Tuesday, February 16, 2010

The Role of Intuition in Trading Decisions

This afternoon I had an unusually strong intuition that the market would close strong and even mentioned my impression to a couple of trading colleagues. Initially, the market ticked down after I told them of my idea, but my certainty did not waver. Within minutes, we broke to new highs and traded higher on expanded volume.

Such intuitive moments are not common for me, but when they occur, they are invariably on the mark. Most of the time, the intuitions are related to market patterns that I have experienced and reviewed. The feeling that occurs on these occasions is a kind of "Aha!" feeling, where everything I have been observing comes together. Instead of seeing isolated market data, I recognize a pattern.

Perhaps the most interesting aspect of these intuitions is that they never come when I am looking for market ideas. The pattern has to come to me; when I look for patterns, I never find them with the degree of certainty and rightness that I feel at the intuitive moments.

There appears to be a brain-based reason for this. An interesting research study found that research subjects who took a tranquillizing drug performed worse on a recall task than those that did not take the drug. The subjects who took the drug, however, scored higher in the ability to perceive novel pairs--a task that relied on "gut feeling".

The researchers hypothesize that two different brain systems are at work in learning: one is an explicit system based on recall and reasoning; the other, an implicit system based upon the brain's reward system. By dampening the explicit learning system, the tranquillizing drug provided subjects with greater access to their gut.

Of course, it is not necessary to tranquillize oneself to gain access to intuition. It may well be that relaxation, meditation, and focused concentration exercises can accomplish the same thing. My experience suggests that periods of intuition are most common following periods of intensive market observation: the intuitive, creative synthesis only occurs after a period of immersive analysis.

Can traders be trained to maximize intuition? I suspect that might be possible, but only if the usual training in technical and fundamental analysis is followed by the teaching of thought-dampening skills that facilitate synthesis.



E-Mini Player said...

Right on Doc! I had the same feeling and posted about it several times on Twitter/StockTwits. In the past, I would be shorting into the up-trend but not any more (a clear sign of progress on this side, IMHO)

nqtraderjay said...

That base was so long, I was falling asleep. If it was sunny out I would've walked. I watched training videos and also had a rally thought, but I didn't take it especially since it was so late in day. I found info on Ichimoku that a guy told me about at the Expo yesterday. Interesting indicator.

Claire said...

Easy to 'intuit' a strong close. Trivial.

Hard to PLAY it with real money.

Jorge said...

Dr. Steenbarger,

but only if the usual training in technical and fundamental analysis is followed by the teaching of thought-dampening skills that facilitate synthesis

Could you please elaborate further in a future post? Thank you.

Best trading,


Leone said...

Is there a difference between intuition and instinct or even gut feeling? Undoubtedly, when one repeatedly performs a certain task or in the case of trading constantly watches the market's action, a 'feel' for what may happen is developed. Is there a difference between this learned process to that of a gut feeling reaction when we meet someone for the first time for example. In other words, do we trust our instinct to situations that we have no learned experience in the same way as to those in a field with wich we are competent?

EdwardK said...

This reminds me of the concept of Remote viewing. From wikipedia:

"Remote viewing (RV) is the purported ability to gather information about a distant or unseen target using paranormal means or extra-sensory perception. Typically a remote viewer is expected to give information about an object that is hidden from physical view and separated at some distance..."

The CIA funded the project in the 70s and it became popularized following the declassification of the stargate project in the mid 90s which somehow involved an aspect of remote viewing.