This article on Objective vs Subjective Trading is the opinion of Optimus Futures.
A common mistake many traders often make is trying to mimic the “intuitive” trading styles of professional traders in order to achieve similar levels of success. In this article, we explain why subjective trading can be a grave and costly mistake and why objective reasoning – at every stage of your early progress in this business – is an absolute must if you wish to succeed in the long term.
Professionals’ Intuition: Subjective Trading
In our quest to debunk the myth of intuition over reasoning in trading, it is fundamental for us to first address what intuitive trading is and why it is often touted as the “professionals” way of trading. We hope that you reach the conclusion, at the end of this article, that trading should be based on data, method and risk management. Variables such as “intuition” come after many years of experience, and even then, it should be used as a supplement for a well-thought and organized method (entry, exit, and risk management).
As opposed to the intuition of a new trader who might perhaps be acquiring all the influence from the strong trend that he or she sees on the chart, a professional’s intuition draws from years of hands-on experience, significant exposure to all market rhythms and risks, countless mistakes that have been learnt from and long periods of sustained profitability.
Over time, these traders can learn to see the market from a viewpoint that may not necessarily require objective ideas and principles that are contained within a trading system or a trading method. It does not mean that these traders don’t use a system. Instead, it only means that they may not be pursuing the system as objectively as a new trader would (and should). The rules of the system and the general mechanics of their trading styles get ingrained into their subconscious and they find themselves simply following their gut – or rather we should say, their ‘trained gut’ – to pinpoint perceived trading opportunities.
The process is perhaps very similar to learning a basic skill like driving a car. While a newer driver will repeatedly want to consciously try and control the car, a more experienced driver will perform the same actions without paying much attention or stressing out because the motor skills and repetitive actions get ingrained into their subconscious mind, making it an ‘intuitive’ task. You would assume that having to repeatedly look and execute the same trading setups would, over time, cause the trader to start relying more and more on gut feelings that have adapted with experience over a strict system on paper.
You should now be able to understand why trying to adopt the professionals’ way of trading before you’re a professional can push you further back rather than forward in your trading journey.
The Power of Objective Trading
While it may actually be more suitable for an advanced trader to rely on intuitive analysis skills, newer traders are infinitely better off relying on strict and objective reasoning, rules and principles to guide their trading success initially at least.
We already know now that the lack of trading experience can often result in misguided gut feelings that if followed blindly can cause severe damage to your trading equity. Let’s consider an example:
Consider a relatively newer trader in a smoothly progressing short trade on the back of a strong downtrend. Still new to the art, this trader might be too engrossed in the ongoing market action if an explicit trading system doesn’t call for this trader to continuously monitor the bigger picture as well. The more recent sharp bounce back up actually resulted out of the market reacting at a long-term historical region of support for this market:
A professional trader following the exact same trading method may not necessarily require a pre-programmed buzzer to remind him or her of the need to look at the bigger picture. Perhaps looking at the sharp extended downtrend with nearly no major pullbacks at all might have taught this trader over time and with experience, that one needs to be wary of the inevitable pullback in such a situation.
He or she, therefore, would likely have been more weary of the historic territory that price was entering in than a newer trader perhaps too inclined to look out for newly learned candlestick patters, chart patterns and trend indicators (like the sequence of highs and lows). That is, unless the newer trader is following a strict system that covers all the aspects and nuances of market analysis and trade execution with clear, objective rules.
While an experienced trader knows how to use the grey areas to flexibly maneuver a trade towards a favorable outcome, the same grey areas resulting from non-concrete thought processes can stress a new trader. Imagine the stress for this fledgling trader who tried to go by the latest price action, which by virtue of consistent lower lows and highs and lack of bullish candlestick patterns, was still pointing to more momentum to the downside.
Being able to see the chart through various angles and employing enough evidence to make sound trading decisions is a crucial art that is seemingly difficult to master without objective measures at first. This helps the trader to eventually build credible and reliable intuitive judgmental capabilities.
The Benefit of Retrospection: Objective vs Subjective Trading
This is another major benefit that objectivity provides a newer trader. As a trader still learning the hoops of the business and perhaps still working on refining the trading approach and the trading system itself, it is critical to reflect on past trading performance and results.
Objective trading methods often provide for clear-cut reasons of why the trade worked or did not work. For example, a trader who follows a system that specifically requires trading only pin bars that appear larger than the preceding candlesticks, can easily weigh the actual pin bars traded in the light of the rule to determine their credibility. An objective trader can potentially categorize trade setups as high or low quality that could take out the stress of random guessing. Again, this type of categorization may take traders years to observe.
A trade that was not successful can perhaps easily be traced to a specific rule of the system that was erroneously not followed. In fact, over a large sample of trades, the trader can actually even deduce the validity of the rules of the system and tinker them accordingly for a revamped and improved trading method.
On the other hand, for a subjective trader, determining why a trade did not work as expected can be difficult work, let alone processing a large sample of past trades that ideally should hold valuable information needed for continuous progress and learning. Even for trades well executed, lack of objective reasoning can make it hard for the trader to replicate that success and learn from it.
What’s more, the very quest of new traders to trade like professionals who appear free of tightly knit trading rules becomes an even more distant dream. Being able to rely on intuition and your gut for most of your trading decisions requires you to have ample exposure and experience doing the same activities over and over. Objectifying your trading approach as much as you can initially is a good way to keep repeating good trading habits, thought processes and actions that eventually mold you into a smart intuitive trader.
There is a substantial risk of loss in futures trading. Past performance is not indicative of future results.