When people ask us whether our own trading is 100 percent mechanical, we hesitate, because… well, it is, but it isn’t. If our trading is 100 percent rule-based, we can’t deny the role of our trader’s intuition.
Indeed, it never violates rules of the positive expectancy model or of risk management, except if we make that choice.
However, if we would have shared our trading system with you, the probability for you to have worse results than us is strong.
Why ? Because, even though our trading system is 100% objective, we unconsciously impose a rule-based trading technique, commonly referred to as traders intuition.
We only “improve” the quality of an objective system with our trader’s intuition.
We don’t break it by adding so much subjectivity that the system would not… be objective anymore.
Table of Contents
0. A trader’s intuition is implicit learning
Trading expertise hinges on the ability to detect and act on patterns that occur within noisy data.
Experiments with implicit learning suggest that we can detect complex patterns in situations without being able to verbalize the specific nature of those patterns.
This occurs routinely when we sense a market behaving differently from usual, or when we get an uneasy feeling about a conversation.
Little children assemble grammatical phrases without knowing the rules of grammar: they’ve encountered so many examples of proper speech that they know what sounds right and what sounds wrong.
They, like traders and conversationalists, develop a feel for patterns and deviations from those.
This gut feeling, the basis of all valid intuition, is not a mere hunch.
It’s the result of countless repetitions of complex patterns.
Intuition is the result of implicit learning that occurs after long periods of observing market patterns.
When we first drove a car, we could barely stay in our lane. With experience, we now anticipate potential accidents several cars ahead.
Many times we tap our brake or become more alert before we are consciously aware of a dangerous situation.
If we needed to rely on explicit reasoning for all life’s activities, we would never be able to respond quickly to danger.
A trader’s intuition is the ability to give sense for us of a feeling; to be able and to develop a feel for reality, as well as a conceptual grasp.
1. A trader’s intuition requires serenity
Serenity is vital to elite performance: a mind at peace is one that can be fully focused on market patterns.
Well, it doesnot require much to understand that when our attention is divided and we are distracted, we lose our gut feel.
In such a state, we cannot pick up on nuances of conversations or small, but significant shifts in traffic patterns.
We lose valuable information, and we lose much of our ability to react quickly based upon internalized patterns.
Worse still, in a chronically distracted state, we never sustain the attention in the first place to internalize complex market patterns.
This is why serenity — the quiet mind — is so important:
Because the implicit pattern recognition manifests itself as a felt sense, a subtle kind of awareness.
With a quiet mind, we can attend to the subtle cues of pattern recognition.
Undistracted, our antennae are extended, able to pick up signals of situations that feel right and those that don’t.
The experienced trader has seen so many markets and perceived so many relationships among market variables that he learns to trust these gut signals.
It is neither mystical nor irrational.
Just as a horse whisperer can become one with the horse, understanding the most subtle communications, an experienced trader can hear the whispers of markets.
But if the mind is noisy, the whispers are drowned out.
Access to intuition requires a still mind.
2. Intuition is not an excuse to gamble
You need to make the difference between what gamblers call intuition and authentic trader intuition.
On the gambler’s side, listening to your trader\’s intuition is an excuse to abandon a rule-based trading system.
The trader-gambler feels like “well i have a strong signal, this will skyrocket, let me go heavy and now”.
And the more often it ends bad, because this kind of trading is like forcing the trade.
Well, that’s it.
If your trader’s intuition leads you to abandon your trading system, a positive expectancy model and strong rules of risk management, then you are probably not listening at your trader\’s intuition but more to your inner gambler.
And you should avoid such intuition at all costs.
3. A trader’s intuition enhances the ability to judge
For us as traders, intuition refers to a method of augmenting our mechanical rule-based models with unconscious logic.
In reality, intuition is a misleading word because it’s not intuition at all.
Intuition is the result of experience.
It is like a subconscious memory that cannot express itself according to rational proofs because our memories do not typically work in this manner.
Well, that sounds very complicated.
Actually it’s not.
Let’s say, you look at a bitcoin chart.
Your objective mechanical system triggers a “Buy at 8000.”
However, your intuition says, “I have seen this type of chart setup before. I know it is going to 7500. I am not buying 8k but let me bid 7k5.”
As you can see, this decision is based on:
- Your trading system calling a buy.
- And a “layer” of subjectivity, calling for a bit more of patience before pulling the trigger.
Finally, this decision is based on trader\’s intuition.
But as you can see, this intuition is more about the fruition of experience.
And your experience is going to influence your judgement as a trader.
Well, a trader’s intuition refers to fuzzy memories of many similar setups in which the market dropped below the rule-based entry level.
Unfortunately, because of the way our memory works, we are unable to say “I remember that on 9th October 2017, the chart was setup with a similar pattern and so there is a high probability of us printing 7k5 and that is why I am buying at 7500 instead of 8000.”
We say instead, “I have seen this before. I am buying lower than 8k bidding 7k5.”
To sum-up, intuition will tell you if the setup is good or bad. But don\’t fall for the comfort trap.
4. A trader’s intuition means to act on discomfort
Well, when you explain what your job as a speculator is to your best friend, you will tell him that :
- Either the market is in trend,
- Either it\’s in a range.
It sounds easy because it’s binary.
So, here comes the real question: why do 90% of speculators lose money?
They lose because successful trading requires that we consistently do that which is psychologically uncomfortable and unnatural.
The setup you have to trade is the one that scares you the most.
Don\’t expect to feel comfortable until an active position finally closes out.
If it feels too good, just don’t do it: everyone else will trade it the same way and become the crowd as we will mention.
The ultra-profitable trade is the one that is almost impossible to execute. So the more awful it looks, like a guaranteed loss, then, that is the profitable trade.
Why? Several reasons:
- If it feels almost impossible for us, then few others can take the trade.
- By doing that which is psychologically uncomfortable, you make the money being lost by the other 90 percent of all speculators.
- The crowd always look for a rationale to take the trade.
But who hell cares about the story ?
Are you here to listen tot the stories that plebs and the media want you to believe, or to make money?
Just make money and go away.
Big profit and discomfort stands hand in hand.
5. Intuition makes you run away from comfortable trades
If a trade feels like easy money… run the other way.
As we mentioned it before, human emotions of fear and greed move price.
We are all human beings, experiencing greed and fear at the same moment.
So, if it feels easy for us, it feels easy for everyone else looking at the same market.
And it’s almost guaranteed to be a losing trade. Simply because it’s too crowded.
If you don\’t get it, just think in terms of this dynamic: Today’s buyer is tomorrow’s potential seller…
So, if everybody is with you on the same side of a trade, it means that everybody has already bought… What’s left? Well, just the selling.
Everybody will dump on you because all the buying pressure is already realized.
You feel comfortable because:
- you are lacking confidence as a trader,
- you feel reassured to see the mainstream media and celebrities on your side.
Unfortunately, this is not how this game work.
Social medias and celebrities are telling you a story that has no future because well, this story has already unfolded.
Don’t you remember this New-York Times post with an outrageous title : Everybody is getting hilariously rich and you are not.
Don\’t you remember Katy PERRY’s tweet at the top of CryptoBubble?
Actually, you have to stand apart from the crowd at all times.
Trade ahead of, behind, or contrary to the crowd if you are smart enough.
Be the first in and out of the profit door.
Always be ready to pounce on the crowd’s ill-advised decisions, poor judgment, and bad timing.
Your success depends on the misfortune of others.
Yes, trading work only in one sense, and not the opposite: yesterday\’s technical analysis that writes today main headlines.
Not the opposite. Never.
You have to understand that:
- If your trader’s intuition leads you to the crowded side, you are probably not a trader yet,
- If your intuition leads you to discomfort, you have probably reached a strong trading level.
As you can see, NYTimes post and Katy PERRY literally called for the burst of the crypto bubble. The smartest play is to sell on these headlines, not to buy…
6. Intuition and bias are ennemies
In 1979, two social scientists, Daniel Kahneman and Amos Tversky, posed various questions regarding risk and reward to people.
The results of their research became known as Prospect Theory and the Reflection Effect.
Their work proved that people were irrational and biased in their decision-making processes.
They asked people to make specific choices between various alternatives.
Kahneman and Tversky first had participants choose between one of the two gambles, or prospects:
- Gamble A: A 100 percent chance of losing $3,000.
- Gamble B: An 80 percent chance of losing $4,000, and a 20 percent chance of losing nothing.
Next, you must choose between:
- Gamble C: A 100 percent chance of receiving $3,000.
- Gamble D: An 80 percent chance of receiving $4,000, and a 20 percent chance of receiving nothing.
Kahneman and Tversky found that :
- Of the first grouping, 92 percent chose B.
- Of the second grouping, 20 percent of people chose D.
It proved that people were risk-averse regarding choices involving prospects of gains and risk-seeking over prospects involving losses.
This means that, as human beings, we are wired the same way.
We are all programmed to take small profits and large losses.
What then separates successful traders from the pleb?
Successful traders have developed a rule-based trading model and listen to their intuition, in a way that forces them to overcome their innate bias toward small profits and large losses.
Their intuition is shaped in a way that after they initiate a trade, they are keen on accepting small losses quickly or to let large profits grow larger.
The trader’s intuition is there to tell us to do that which is psychologically unnatural and uncomfortable.
So by the end, our trader’s intuition forces us to succeed despite our biases by triggering our memories and influencing our judgement by exploiting the irrationality and biases of other market participants.
7. A trader’s intuition is contrarian to the crowd
As we said, by taking the difficult trade, you make the money being lost by the other 90 percent of all speculators.
You know too that 90% of all speculators fail.
So, simply, why not trading the opposite than what the pleb is calling for?
Well, statistically, it should bring you good money.
- No one knows exactly what the crowd is thinking.
- Focus on what you see in price and trend, and just ignore trying to outsmart the market.
If you are the contrarian of a profitable contrarian, you are probably with the crowd.
To say it in an other way, never use contrarian thinking as an excuse to trade against price and trend.
A trader’s intuition leads to thinking independently.
Independent thinking requires some nuances that being a \”strict contrarian\” does not allow.
Contrarian thinking is usually non-thinking and it stems from a lack of confidence and a belief that the market must be tricked or outsmarted.
So, yes, you should be a contrarian, but don\’t be a dumb one.
A trader’s intuition plays an important role in getting in and out of positions.
Your task, as your own performance coach, is to know how your system operates, avoid its shortcomings, and maximize its strengths.
Yes, there’s a role for intuition in trading, but beware of situations where you are, wishing in order to avoid bias.
Those are usually excellent points to get flat and regain perspective.
Your trader’s intuition is ultimately a complete part of your trading system.
We are Subverto Trading Club, a group of professional traders from around the globe who were drawn together under a common objective: To seek out students who are determined to empower themselves with the skills needed to be successful in trading. Whether you want to supplement your primary career or make your way as a professional trader, we have the tools and expertise to show you the way.
Come check out our discord with a free 3-day trial: ask questions, peruse chat history, and observe us at work. We look forward to seeing you there!