Trading From Your Gut: Why You Need Intuition

In online trading communities, it’s common to see intuition dismissed, or even ridiculed. Scroll through Reddit or any trading forum and you’ll quickly find the usual cynicism: “day trading is gambling with an edge,” or “technical analysis is horoscopes for men.” It’s as if trusting your instincts is a sin, and believing in skill is naïve.

“Trading From Your Gut” isn’t just the title of a book I recently picked up. It captures something I’ve believed for a long time. Written by the same author as Way of the Turtle, it finally puts into words what traders rarely seem to discuss: there’s more to successful trading strategies than statistics.

Unsurprisingly, most unsuccessful traders you will meet are not optimistic people. After the frustration that comes with this pursuit and falling short, they are not eager to admit their personal faults. It must be the market that’s untamable – it’s chaos; it’s rigged; no one can crack the code. Perhaps most harmful of all, this mindset filters down to beginners, teaching them that successful trading can only come from the ones who are essentially just luckier.

But if you’ve ever felt that markets aren’t just noise, that profitable trading is not a result of luck-based gambles, that trading is a skill that can be developed, you’re not alone. This book should resonate with you as it did with me.

Foreword by Van K. Tharp, Bestselling author of Trade Your Way to Financial Freedom and Super Trader

“Amazingly, developing your intuition and understanding the benefits for your trading psychology are the very kind of ideas that most traders want to pass over. They want facts and computerized methods that “work”. My experience of nearly 30 years as a trading coach, however, has clearly demonstrated that you cannot become a superb trader based purely upon mechanical trading methods. Intuition is an integral component of the success for the best traders in the world.”

Preface

“I have seen many traders paralyzed by putting too much emphasis on the rational analytical decision process. They only use part of their mind—the analytical and linear conscious mind of the left brain hemisphere. They use their intellect but not their intuition. If you want to trade at the level of a trading master, you need to develop both parts of your mind—your smarts and your intuition.”

Chapter 1: The Power of the Gut

The intuitive mind is a sacred gift and the rational mind is a faithful servant. We have created a society that honors the servant and has forgotten the gift. –Albert Einstein

Are you a trader with a decent amount of trading knowledge, who still feels uneasy when pulling the trigger? If you know you have significant experience in trading already, don’t ignore it – analyze what it’s coming from.

“The right brain is concerned with the whole picture and the spatial relationships between each of its parts. The right brain is quick and intuits instead of reasons. If you’ve ever felt uncomfortable or unsafe but couldn’t pin down the reason, this was your right brain’s sense of intuition generating that feeling. The right brain excels at reading patterns and interpreting their meaning in the context of a larger picture, and it moves much more quickly than its counterpart.”

Your average trading analysis may take anywhere from a minute to several hours. On the other hand, the right brain can pick up on clues in a fraction of a second.

The tradeoff is that the right brain cannot generally explain how it arrived at its conclusions. This is why building experience is so vital. Without it, your gut will be finding conclusions without enough information to justify them.

“There is a big difference between trading emotionally and trading from your gut. Trading emotionally means reacting to fear and hope, which can destroy your trading decisions. Trading from your gut is different. It is a way of tapping into the extra power of the right hemisphere of the brain, which can be a powerful, effective, and entirely rational addition to any trader’s repertoire.”

The Two Trading Camps

Are you a system trader (left-brained)? Does the idea of incorporating trading intuition bother you because it’s not based entirely on statistics? If so, you might be missing something big on your path toward trading mastery.

“The best discretionary traders tend to be right-brain dominant, using their intuition to decide when to make trades. This tendency is especially prominent among discretionary day traders who look to profit from small intraday price movements. They might describe their approach as having a “knack” for the market or a “feel” for the direction of the market.”

The key is not to fall in love with one side too much. Too many traders rely solely on their analytics data, and don’t bother investigating their trading approach further.

But you need to use your whole brain to achieve trading mastery. You won’t achieve mastery by simply focusing solely on your stats or solely on trusting your intuition.

Mastering the Art of the Trade

“To become a master trader, to be able to intuitively make good decisions, you must first gain enough of the right kinds of experience. This is why doctors and nurses go through extensive training and supervision when they are new to the profession. It is why firefighters train in fire simulations, and why airline pilots train in flight simulators. Through this constant exposure and consistent practice, experts build up a library of experiences that they can draw upon when making decisions.”

It makes sense doesn’t it? The doctor with 20 years of experience may get a feeling that something is wrong even though a patient’s tests come back normal. From time to time, this experience results in saving someone’s life when the technology fell short.

Similarly, when you’ve traded for long enough, you are going to feel things that new traders will not. Some teach that traders aim to resemble emotionless robots in order to execute consistently. But the more you progress on this journey, the more you will realize that this is far from the truth.

Chapter 2: The Purpose of Gut Intuition

“The best purpose of gut intuition is to keep us from wasting time on the wrong approach and to keep our conscious, rational mind focused on what is important.”

When you’re evaluating your potential setups, are you able to take a set of 4 (or 8 or 100) examples, and identify the differences between them relatively easily?

See the double tops in the figure on the right. There are traders who believe that for a double top to be “real”, each case should result in profits without taking any other information into consideration. When they take these trades, half of them fail, and price trends higher.

Or, a few work out, a trader makes money, and is convinced this is a powerful setup on its own.

I’m generalizing, but in reality too many traders approach trading in this way. Take it a step further and really understand what’s going on in each situation.

This is something I still do with all of my trading models and setups, constructing and deconstructing new ideas repeatedly. If I can’t figure out what factor is integral to a setup working each time, it’s shelved. When I have more data I will revisit it, or invalidate the idea altogether.

Now, when I get a setup that looks good, I often have a sense for if it will work as it did last time. If I’m still not sure, I will evaluate it based on certain criteria. I may miss the initial entry if it’s confusing, but I can always enter slightly later when new information reveals that the setup will work.

This “sense” is a direct result of the hours spent evaluating the different instances of a particular setup.

Whole-Mind Learning

“When master traders use their whole mind to trade, they alternate between analysis and ranking from left-brain and right-brain intuition in a cyclical fashion. Optimal learning involves a continual iteration between the two hemispheres. For example, as traders execute new trades and gain more experience, they will continuously notice patterns in trade performance and market pricing using their right brains, and these patterns will cause them to have questions.”

This is something I only recently realized was part of my trading intuition, and not merely an extension of typical chart analysis. Needless to say, it was validating to see it discussed in this way in depth.

Practicing daily for several hours, in addition to thoroughly testing your theories, is vital to find this deeper understanding of your own strategy. These repetitions are what allow you to build your trading intuition enough to keep you in the right moves and help you avoid the wrong ones.

“However, during this process, the right brain will have plenty of opportunities to take notice; this might bubble up to the surface of consciousness as a feeling that a particular pattern being presented is important, and the left brain will then try to rationalize this feeling. If the left brain is unable to do so, left-brain-dominant people will often discard the feeling as irrational. However, right-brain-dominant people will pay more attention to the feeling; they might even act on it without an explicit rational, linear, left-brain reason.”

Chapter 3: Wrong-Brain Thinking

“Livermore demonstrated that money could be made in the markets because the nature of the people trading never changed.”

It helps to know that what you’re studying in price action will work forever. Despite the technological boom of the 20th century, the advent of sophisticated trading algorithms, data analysis, and more, fundamental market patterns continue to warn us of impending shifts in momentum.

It should also be reassuring to know this information is available to every trader today. You don’t have to look beyond your charting software, and you really shouldn’t (I recommend ThinkorSwim, by the way).

News and Noise: Listening to What Matters

“If you overload the sensory system, it will go numb and start to ignore the signals it receives. This is one of the reasons 24-hour financial news channels can be so harmful to traders. Too much data exists, and much of it is irrelevant. The perception system is designed to look for outliers, the standouts. If you spend too much time listening to news channels or reading the wrong blogs and Twitter streams, you can start to lose the ability to distinguish the standout from the noise. Most of the time, the markets are not doing anything that merits our attention.”

What you need to focus on is your chart – seek only the information that can directly inform you on what price is doing and will do next. You must ignore everything else. This includes what your friends are trading and whether they’re long or short. Unless your strategies are closely aligned and these friends are more experienced than you, you have nothing to gain from that knowledge.

“If you want to be a master trader, you need to develop your own reasons for making trades.”

Conclusion

How I Started

Early in my trading journey, I was fortunate to connect with an experienced day trader who I’ll call Jay. He introduced me to technical analysis, indicators like the MACD and EMAs (which I continue using today), and insisted that I was wasting my time with equities instead of futures.

With a few more years of experience behind me now, I realize the real lesson came from how he saw the market.

As patterns played out the way he had explained them, I realized that there were inevitable conclusions to certain market conditions. This resulted in a feeling of supreme confidence, which he didn’t have the words to express adequately.

While experienced traders pick up on subtle clues about what will happen, it’s tough to quantify that for an analyst. Even when thoroughly analyzed, a new trader will not feel the same confidence until they’ve practiced it themselves.

Because I’ve spent years refining both my structured setups and my gut-based decisions, others’ dismissiveness doesn’t affect me anymore. It shouldn’t bother you either. You’re here to pursue mastery, so you will need to develop this.

If you like the content, you should consider getting the book so you can explore it further. Once you understand exactly what’s going on with your gut, building your trading intuition will be easier.

How You Should Start

If you are a beginner, more of your time should go towards backtesting, rather than conquering your instincts. Your emotions are more often going to be due to lack of experience, rather than any real understanding about the markets or the quality of your trades. But keep it in mind as you continue to learn. The biggest factor in developing trading intuition seems to be time.

So keep showing up. Even when you’re not making money, the time you put in adds up. You’re training your gut, giving your subconscious data that it will use to serve your future self. Eventually, you’ll realize that focusing solely on statistics about patterns and setups was not only limiting, but missing the most crucial element: you, the trader.