Is Intuition in Trading Real or a Self-Delusion?
This article originally appeared in the Ask Jack column on Bidnessetc.com. Each article answered a question submitted by readers.
In an interview in Market Wizards, I asked Ed Seykota a similar question: “How important is gut feel?” I can hardly do better than beginning with his answer: “Gut feel is important. If ignored, it may come out in subtle ways by coloring your logic. It can be dealt with through meditation and reflection to determine what’s behind it. If it persists, then it might be a valuable subconscious analysis of some subtle information. Otherwise, it might be a dangerous sublimation of an inner desire for excitement and not reflect market conditions. Be sensitive to the subtle differences between “intuition” and “into wishing.”
Seykota gets to the heart of the matter. Intuition can be very helpful, but one needs to distinguish between valid and meaningless intuition. A gambler betting at roulette might have a hunch that the next spin will bring up the number 27, but that intuition is worthless self-delusion. It will not alter the gambler’s edge on the bet, which is negative to start with and will stay that way. A trader’s intuition, however, can be quite different because it might be based on facts and experience rather than some imaginary ability to predict a future random event.
There is nothing mystical or superstitious about intuition. As I see it, intuition is simply subconscious experience. When a trader has an intuition that the market will move in a given direction, it is often a subconscious recognition of similar past situations.
Emotional influences can compromise the objectivity of market analysis and trading decisions. For example, a trader might ignore signs that the market is moving higher because she has procrastinated in placing the position, and entering now would confirm the mistake of not having bought previously when prices were lower. Or, a trader who is long will be more inclined to dismiss market evidence that she would otherwise have interpreted as bearish in the absence of a position. It may just be too painful to accept a bearish forecast when she is long and hoping for higher prices. As a final example, a trader who is on the record with a forecast for the market moving higher or lower will be reluctant to accept contradictory evidence. These types of internal constraints may cloud conscious analysis and trading decisions and prevent a trader from recognizing evidence that is uncomfortable to accept. The subconscious mind, however, is not inhibited by such constraints.
As one trader I interviewed (who requested anonymity) said, “The trick is to differentiate between what you want to happen and what you know will happen.” In many cases, intuition may be the trader’s subconscious knowledge of what will more likely happen breaking through the conscious desires of what the trader hopes will happen. Such internal messages should not be ignored. What we call “intuition” may just be the objective synthesis of the available information based on past experience, unhindered by emotional distortions. Unfortunately, we cannot tap into our subconscious thoughts at will. However, when these market views come through as intuition, the trader should pay attention.
We have established that there is legitimate intuition in regards to trading, but the key question remains: How do individual traders know whether their intuition represents meaningful insight on meaningless wishful thinking? I believe the best answer is that traders can determine the relative value, if any, of their own sense of intuition by conducting an empirical test. Specifically, a trader should simply keep track of all trades that were taken on the basis of an intuitive conviction and see how they turned out. The outcome of any single trade will not be meaningful, but the net result of all such trades should provide insight as to whether the trader should act on intuition or ignore it. The results will vary widely. Some traders may discover that their most reliable trades are the intuitive ones, whereas others may disappointingly realize that their intuition is in the words of Ed Seykota nothing more than “into wishing.”
As a final word, impulsive trades should not be confused with intuitive trades. The former are almost invariably a bad idea, while the latter can be high-probability trades for experienced traders.
Submit your own trading or investment question:
jschwager@fundseeder.com
