Does intuition and gut feeling play a role in trading?

Does intuition and gut feeling play a role in trading?


Does intuition and gut feeling really exist in trading?

Whenever you hear traders talk, they use the words intuition or gut feeling to express their thoughts and to justify their decisions which are often not based on sound trading principles or trading rules, but on something different, something they ‘felt’ about what is going to happen next; or so they claim. However, it is very important to distinguish between real intuition and what traders mistake as intuition.

Trading Intuition

Intuition and impatience

The most commonly made mistake is that traders use intuition to justify trades where they prematurely entered the market and broke their trading rules. They will then say that they had a feeling that price was about to take off and that they didn’t want to miss the trade. Be honest to yourself, how often does that really happen?

Confusing intuition and undisciplined trading is what causes major losses. This is especially true for discretionary traders. The more room for interpretation in a trading methodology, the more often traders will use the word intuition or gut-fell to justify trades which they know should have been avoided in the first place.

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Intuition and delusion

Intuition does not only play a role when it comes to trade entries, but it goes much deeper. Gut-feel is also used to rectify staying in losing trades much longer than anticipated. When traders start thinking that they can sense that price is about to turn around, that’s when the disaster usually starts. Although traders might call it intuition, once you are in a losing trade, your brain starts looking for reasons why not-realizing the loss and avoiding the negative feedback from closing out a losing position is the best thing to do.

This is why having a trading plan in place before you enter the trade is so important. It helps you make rational decisions which are not subject to emotions and wishful thinking, but based on your analysis. Always know when to get out before you get into a trade.

The role of real intuition in trading

After we have shown you what intuition is not and why having a wrong idea of intuition can significantly contribute to trading failure, we can now take a look at what real intuition is and what its role is in trading.

In our experience, and by listening to other experienced traders, they all describe that intuition plays an important role in their trading. But, it is also very obvious that intuition only comes with years of experience. Thus, intuition can be seen as a form of subconscious pattern recognition. After a trader has spent hundreds and thousands of hours in front of his charts, being exposed to tens of thousands of market moves and patterns, it has become a part of him. What he then identifies as intuition is nothing but a subconscious recognition of a market pattern he has seen so many times before.

Are you ready for intuition?

This question sounds rather absurd, but the implications are very important to understand. Intuition is a form of subconscious pattern recognition and it can, therefore, only exist if a trader has spent enough time trading. Especially new and inexperienced traders should stay away from using the term intuition and gut-feel when it comes to making trading decisions, because what they mistake as gut-feel is just a form of undisciplined and unstructured trading.

Developing intuition

Yes, you can develop intuition or, should we say, you can increase the rate at which you develop subconscious pattern recognition. Deliberate practice should be an important part of your trading routine and those points fall into this category:

  • Creating a trading plan and laying out potential trade scenarios. Knowing what you are looking and waiting for instead of randomly flipping through time-frames and charts
  • Having a trade-checklist and being very clear about what describes the ‘perfect’ trade for your methodology, instead of second guessing and constantly changing your approach
  • Saving screenshots from your past trades and reviewing them. Evaluating what works and what does not, help build a better understanding of your method

Tracking and validating your intuition

As we have said, not all traders should rely on intuition. The level of experience and how easily they respond to emotions and psychological factors determines the role intuition should play in their trading. By tracking your trades in a way that allows you to quantify the impacts of intuition, you can immediately find out if your intuition serves you well or if you should exclusively rely on your trading rules.

Trading futures and options involves substantial risk of loss and is not suitable for all investors. Past performance is not necessarily indicative of future results. The risk of loss in trading commodity interests can be substantial. You should therefore carefully consider whether such trading is suitable for you in light of your financial condition. The placement of contingent orders by you or broker, or trading advisor, such as a “stop-loss” or “stop-limit” order, will not necessarily limit your losses to the intended amounts, since market conditions may make it impossible to execute such orders.

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