I’ve heard experienced traders talk about trading on “gut feel.” Inexperienced traders need to be cautious about this sort of trading – if they don’t want to see their trading accounts clobbered.
What exactly is gut feel? I see it as the way our previous experiences have stacked up to guide our decision taking.
You’ll need to forgive me for bringing science in here, but scientists and traders have quite a few things in common – one of which is that we’re constantly trying to analyze data to construct the most accurate or financially beneficial models of our worlds. The astronomer James Christy’s discovery of Charon – Pluto’s moon – is a great example of using previous experiences to see the true picture.
After Christy discovered Charon he looked back at other people’s work and he realized that Charon had already appeared on many other images of Pluto – but people hadn’t seen it.
So why hadn’t the people who had analyzed the images before – and we’re talking about professional astronomers here – realized Pluto had a moon? It turns out that Pluto and Charon were closer together than anyone had ever expected a planet and its moon to be. The astronomers who had seen images of Pluto and its moon together had discarded them, believing the images were distorted because Pluto appeared to be “elongated.” The “elongation” was, of course, Charon.
The astronomers’ minds had been conditioned to interpret the images incorrectly. Here’s what Christy said about the discovery (from Planets Beyond by Mark Littman):
“When I first saw these exposures on June 22, 1978, I was looking with the mind and eyes of an astronomer who had examined roughly 50,000 images in recent years. Many of these images had been of double stars exposed in the course of the U.S. Naval Observatory’s extensive double-star program. I had seen dual images blended together in all possible circumstances by all combinations of image distortions. My mind was now attuned to two celestial bodies disguised as one. Now I could think: Pluto has a moon.”
Christy’s mind had been conditioned by years of experience to see the possibility that the elongation in images of Pluto was actually its moon.
In our day-to-day lives, our minds are conditioned and tuned – just as Christy’s was – on the basis of our previous experiences. When we use these accumulated experiences sub-consciously we call it gut feel.
The better the mind has been conditioned, the better the prospects of gut feel actions having a successful outcome.
When we’re trading, if our minds have been conditioned by years of observations and experiences during different phases of market behavior they can reach better conclusions than if they’re less experienced. The sort of gut feel that can sweep across stocks, commodity and FX markets and pick up more than its fair share of good trades doesn’t come quick and it doesn’t come cheap. It takes years of experience with plenty of costly mistakes along the way.