Should you be an intuitive trader?

Intuition is a tricky subject, because there’s no way to prove or disprove that it exists.

Consider though, that there’s a strong psychological incentive for human beings to provide an explanation for coincidences: we want to feel in control.

A mother loses her child in the mall, but soon finds him again.
“I just knew where to look. It’s a mother’s intuition.”

A man who doesn’t gamble is suddenly inspired to buy a lottery ticket, and wins $10,000.
“I don’t know, something just felt different that day.”

A trader bets against the Bank of England, and walks away with more than a billion dollars.
“My gut told me it was the right move.”

With so many examples of success by intuition, it’s no wonder people try to get an intuitive feel for everything they do.
“Just one more round. I’ll make back everything I’ve lost… I know I will!”

With all the spotlight on intuition-led success however, all the other cases of intuition-led failure get ignored.

No one pays attention to the mother who was unable to find her lost child. Nor to the people who “felt different” but didn’t win the lottery. Nor to the traders who had a “gut feel” but lost a whole bunch of money.

What makes intuition so seductive, is that it appeals to human laziness. Why bother to apply the tedious work of logical examination, when all you need to do is “feel” the answer?

Now, I’m not saying that real intuition doesn’t exist. I don’t know if it does or not.

What I do know however, is that the “intuition” card is a dangerous one to play in the world of trading.

When amateur traders try to get a “feel” of the market, more often than not, all they’re really doing is avoiding the hard work of tracking, analyzing, correcting and improving their trading process.

The natural tendency is for people to indulge in the idea intuition, because intuition is easy. No hard work or logical thinking is required. You just need to “feel” it.

Cognitive Reflection Test

Consider these questions. Try to answer them before you continue.

  1. If it takes 5 machines 5 minutes to make 5 widgets, how long would it take 100 machines to make 100 widgets? ____ minutes
  2. A baseball bat and ball cost $1.10 in total. The bat costs $1.00 more than the ball. How much does the ball cost? ____ cents
  3. A magic drop of water is placed in a giant container. Every day, the drop of water doubles in volume. If it takes 48 days for the drop of water to completely fill the container, how long does it take to fill half the container? ____ days

Do not continue until you’ve decided on your answers.

Ready?

..

.

Ok.

Each of these questions have an obvious (intuitive) answer, and a correct answer.

Let’s take a look.

Question 1: Intuitive answer: 100 minutes ; Correct answer: 5 minutes

Question 2: Intuitive answer: 10 cents ; Correct answer: 5 cents

Question 3: Intuitive answer: 24 days ; Correct answer: 47 days

Well, how did you do?

The danger of “intuitive” decision making

Intuition seems to work via the subconscious recognition of patterns.

For example, each of the questions above follow an obvious pattern that leads to the wrong answer. The intuitive answer “feels” right, but is logically wrong.

As I mentioned earlier, I don’t know if real intuition exists. The thing is though, that even if it does, I have no idea how to attain it.

So as much as I can, I prefer to rely on logical thinking and trial and error. It’s not as elegant as simply “using intuition”, but it’s the most reliable way to get results.

As far as I know, trading is not about betting on one inspiring idea and winning big, but about slow and incremental testing, tweaking, and adaptation.

In movies, the hero wins after getting a great idea and beating the bad guy in a grand final showdown.

In real life trading, you win keeping your head low, putting in the work, and quietly outlasting everyone else.

By |2016-11-06T07:40:47+00:00September 16th, 2016|Mindset, Philosophy|11 Comments

11 Comments

  1. Okeke September 16, 2016 at 10:27 am - Reply

    Aw Chris! I only got one answer correct.(Number 1) and that’s only because many years ago, I remember my primary school teacher asked us a similar question in class: If it takes 5 minutes to fry an egg, how many minutes will it take to fry 5 eggs?
    Anyway you are right about relying on intuition in trading. Someone said assumption is the mother of all screwups! Well let me rephrase that and say, in forex trading intuition is the mother of all screwups!

    • Chris Lee September 16, 2016 at 11:33 am - Reply

      I hope you enjoyed the other two questions. 🙂

  2. Robert P. September 16, 2016 at 11:45 am - Reply

    Interesting article Chris. For me, my intuition is an educated intuition. You said it correctly in your closing sentence. “Putting in the work” is an important key. I tried trading with just intuition when I first started trading and it was a disaster. Only when I had put in the work did my intuition become sharp. Just like a world class athlete who spends years practicing to become a star, the same is true for a trader, practice, practice, and more practice to become a star trader! Intuition? OK maybe, but it better have training and lots of practice behind it or you will never succeed!

  3. Kevin . TDT September 16, 2016 at 11:25 pm - Reply

    Hi Chris
    Another great article/post/thought provoker
    1stly I agree that just trading with intuition does = disaster
    But
    Is there a place in trading for intuition ? Yes for the really good traders provided it is based on solid experience, ground work and a solid trading plan etc
    But … You have to be ever so careful that you don’t fall into the trap
    (As I have at times) of slipping into intuition mode to much/often and therefore overriding all the above to much.

    Does Black Box trading work ? not many
    so whats the difference between Black box trading and intuition trading ?

    That’s what the top traders have figured out what works best for them

    Cheers
    Kevin
    TheDreamingTrader

    • Chris Lee September 17, 2016 at 5:04 am - Reply

      Thanks for sharing Kevin. 🙂

  4. Alex McCullie September 17, 2016 at 12:39 am - Reply

    For newer or less experienced traders like me I believe that using a systematic almost mechanical approach is far safer and more instructive. Take one or two popular methodologies with strictly controlled risk management and then work them to death on a limited range (even just one) currency pairs. Then review and learn as well as accept losses as the cost of doing business. This is the way of achieving high level skills of any craft. Intuition does come but should be always be subordinate to a system.

    • Chris Lee September 17, 2016 at 5:05 am - Reply

      Just to take the idea a little further: why would a mechanical approach be safer?

  5. Kevin September 18, 2016 at 12:34 am - Reply

    Hi Chris
    how do ya get 5cents as the answer to question 2 please ?

    Cheers
    Kevin TDT

    • Chris Lee September 18, 2016 at 6:06 am - Reply

      Bat + Ball = $1.10
      Bat = $1.05
      Ball = $0.05
      The bat costs $1 more than the ball. 🙂

      • Kevin . TDT September 18, 2016 at 8:08 pm - Reply

        Off course
        Really great example of not seeing / thinking clearly about what one is looking at . What we are looking at / seeing on the charts is very often like that. That’s why it is Sooooo much easier to look at the charts after the facts (In hindsight)
        Been there done that many times
        Cheers
        Kevin
        TheDreamingTrader

        • Chris Lee September 23, 2016 at 9:41 pm - Reply

          🙂

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