Today I want to talk a little bit about intuition or gut instinct and how to test yours and improve it.
This short post is particularly relevant for discretionary traders, but I’m sure systematic traders will also find it to be a worthy read.
For starters, what is intuition?
Simply put, intuition is knowing something without knowing exactly why you know it. Typically, it shows up as an abstract gut feeling rather than a conscious bout of logical thinking.
At its core, intuition is a pattern recognition skill, but it’s processed on an unconscious level in the brain.
For example, when you meet a person, you usually have some type of intuition about them based on how they look and carry themselves.
Your brain is unconsciously picking up on the little behavioral cues that person is displaying (like some micro facial expressions, eye movement, hand gestures, feet and body orientation, etc.)
These little behavioral cues give you a ton of information on that person—whether they’re kind, benevolent, inviting, confident, shady, unreliable, insecure, and the list goes on.
And immediately, based on previous the experiences you’ve had with those micro, unconscious cues, you just ‘know’ what’s going on with that person and what to expect from them even though you yourself haven’t consciously thought about it.
That’s an example of how intuition works. It’s unconscious pattern recognition and information processing going on in our brain… and we use it every moment of our life–we’re constantly following our intuition.
So, while our in-the-moment intuition is quite intangible and difficult to describe or pinpoint, it is an ability that can be practiced and improved upon, so that it becomes more reliable.
And I think, as a trader–more so as a discretionary trader—refining that ability should be one of your top priorities.
The only real way to get better at listening to your intuition and separating real intuition from some mere insubstantial feeling is to practice it in small and controlled ways.
What do I mean by small and controlled?
Before you even think about using your intuition in the market with your hard-earned money on the line, I would recommend that you first test it, develop it, and learn to trust it.
Let’s break down these steps…
Test Your Intuition
First, find ways to test your intuition, where if you’re wrong, it doesn’t matter–you don’t risk losing anything.
One of the things I recommend doing–and I’ve been doing this myself for years now—is to try to guess what the weather will be like on any particular day without looking at the weather forecast.
This is a nice little way of testing your intuition and seeing how accurate it is. Ideally, do it often to get a better reading on how reliable your intuition is.
Another option is filling a big opaque jar with marbles or pieces of candy, and then guessing how many are in the jar.
Do it with someone else, and whoever’s the closest wins some money or something like that.
That’s another really fun way for you to test your intuition, without really risking anything substantial.
Develop Your Intuition
The second step is to develop and refine your intuition. Here are two ways to do that:
1. Step Back.
Let’s roll with the weather example once again. It’s pouring rain outside right now… what’s the weather going to be like 2 hours from now?
Well… we don’t know for sure. But we could look at the season we’re in; we could look at what the past few days were like, and based on that data we can come up with an intuitive answer.
If you think about it, that’s exactly what we do in trading… it’s very much like predicting the weather. The market is doing XYZ right now… what can we infer from this based on historical data?
Based on what the market did in the past, what should happen or could happen? And how much I’m willing to wager on it?
That’s what trading is all about. You step back, you look at the bigger picture, and you make an informed guess.
So, start practicing this with the weather. It’s a nice and harmless way to test your unconscious pattern recognition skills. It’s also a nice way to keep your mind sharp.
But don’t just do it with the weather. Think of some other small ways to develop your intuition. For instance, maybe when you get a phone call, don’t look at it right away and try to guess who’s calling.
2. Quiet Your Mind.
When our minds are busy, it becomes hard to tap into our natural intuitive abilities.
As you all know, meditation is one of the best ways to cultivate a calm and quiet mind. Not only that, meditation also helps you be more in tune with your feelings.
By taking some time every day to practice, you’ll slowly open a space for your intuition to speak to you and for you to recognize when it’s doing so.
If you want to learn more about meditation, check out these articles:
Alternatively, check out the Trading Psychology Mastery Course. It’s a 2-week deep home immersion mindfulness-based trading psychology course where we explore the practice of meditation.
Trust Your Intuition
Now’s the time to put it all into practice in the market.
Outside of market hours, look for your trade candidates, and as per usual, do your analysis. Quiet your mind and allow your well-practiced intuition to surface. And take note of your observations.
And during market hours, do the same… quiet your mind, and execute.
But this time, since real money is on the line, expect some conflicting signals in your body and mind making it harder to determine what is genuine intuition and what is just mindless fear.
So, as you begin use your intuition in the market, I would recommend that you start trading with small trade sizes. This will mute certain emotions and help you listen to your intuition and trust it.
Remember, you’re learning to exercise your intuition muscle, and so it must be done in a controlled setting at first. That’s what small sizes help you do. Later, you can slowly work your way up.
So, this is how to develop your unconscious pattern recognition skills—aka intuition.
The steps are simple: test, develop, and trust.
Sometimes, you’ll see that you have a gut instinct but it’s just a small one, so you’re not completely sure. And other times you’ll see that have a gut instinct where you’re like, “I know this is right, I just have to follow my gut.”
The above steps will teach you how to actually read your intuition, how to determine how certain you are with your guesses, and how to trust your inner voice when it speaks.
But keep in mind: No matter what you do as a trader, whether you’re a systematic trader, a discretionary trader, a day trader, a scalper, an options trader, a crypto trader, a futures trader, whatever… managing your risk is paramount.
This allows you to be wrong and stay in the game for the other opportunities the market will hand you.
So, be intransigent there and no matter how you trade or what you trade, you will have a long-lasting trading career.
Speaking of trading career, a trader wears many hats — they’re analysts, risk and money managers… they’re their own coach as well. But perhaps above all, a trader is a business owner. This is really important.
My Trading for a Living Course is getting a major update on June 28th, and trading as a business will be one of the main themes we’ll explore in the course.
In short, a trading business is like a little privately owned casino. Casinos are businesses. They have table limits, they take the bets that are to their advantage, and all of that is clearly stipulated in their business plan. And they simply let the probabilities work for them over many small bets. That’s how they’re profitable despite a few winning gamblers here and there.
And that’s really how a profitable trading business operates. If you want to learn more about the course and the upcoming updates, check out this post.
Thanks for reading.
Memorable Lines From This Post
In trading… it’s very much like predicting the weather ... Based on what the market did in the past, what should happen or could happen? And how much I’m willing to wager on it?
Start trading with small trade sizes. This will mute certain emotions and help you listen to your intuition and trust it.
[Managing your risk] allows you to be wrong and stay in the game for the other opportunities the market will hand you.
A trading business is like a little privately owned casino. Casinos are businesses. They have table limits, they take the bets that are to their advantage ... that’s really how a profitable trading business operates