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.