Thursday, 18 December 2014

Trading and Intuition

I Share with you a very good article written by Adam Milton, About.com Guide

Trading and Intuition 

I was once asked by a trader how they could determine if a market was moving decisively (i.e. was moving in a single direction), and my answer was that if they were not sure, then the market was not moving decisively. In other words, if they looked at a chart and they didn't immediately know which direction the market is moving, then it was not moving in a single direction.

Intuition and Instincts
I was suggesting to the trader that they use their intuition and instincts in deciding if the market was moving as they required, rather than a fixed measurement (e.g. an indicator being above or below a particular level). Intuition and instincts either play an important role in trading, or they play no role at all. This is because they apply differently to discretionary and system trading.


Discretionary Trading
Discretionary traders can (and very often do) use their intuition to confirm (or negate) their trading decisions. For example, a trader might decide not to make a trade because the trade would require a slightly larger stop loss than usual, even though all of their entry requirements had been met.

While discretionary traders are able to use their intuition and instincts in their trading, they need to make sure that they do not confuse them with fear and greed. (Immy: This is a Very Important Point)

For example, whenever a trader decides not to enter a trade based upon their intuition or instincts, they need to know why they are doing do, otherwise it is possible that the decision is based upon fear of a losing trade. Similary, if a trader decides to hold a trade longer than usual, they need to make sure that it is their intuition rather than greed that is making the decision.

Knowing the Difference b/w Intuition and Emotion 
Knowing the difference between intuition and emotions is something that will come with experience. (Immy: Here is an Easy Way to Find Out whether you are trading with Intuition or Emotions? The newbie might find him/her self mostly in the later category.) In the meantime, if you are making a trading decision and you find that your heart is racing or that you are starting to sweat, you are probably making an emotional rather than an intuitive decision.
 
System Trading
System traders on the other hand, cannot use their intuition in their decision making process. System traders make their trading decisions during their testing and analysis of their trading system, rather than during live trading. If a system trader starts using their intuition and instincts to modify their trading decisions, they are no longer a system trader, and they may need to modify other aspects of their trading accordingly (i.e. there is no such thing as a part discretionary and part system trader).