Trader's Instinct

A few days ago, I sent out an SOS via email to my trading instructor after having been nonplussed by the market, my trades, and everything I’ve been doing so far in my scalping activities.

M was very kind and responded by calling (well, ok, the truth is, M's not really big on writing). In the course of our conversation, the words "instinct" and "intuition" came up a few times. I've been mulling over them since. It doesn't bother me a bit that my trading coach believes that "instinct" plays a part in trading, probably coz I tend to see trading as an art. I believe that to master it, our “sixth sense” SHOULD be included in our depository of trading arsenals.

For me to make a claim like this seems a tad out of character, since I'm supposed to be among those whose left-brain is somewhat more developed than the right – a typical INTJ. Logical and pragmatic – that’s what we are. I reckon that it's precisely the pragmatic side of me that makes me see the folly of hanging on to the limiting belief that the only way to figure out the market is via logical and scientific analysis. In fact, it's senseless to even want to figure out what the market is going to do in the next few minutes as if it will let you, if only you'll TRY.

Truth be told, the market is essentially organic. It's alive and is constantly growing and evolving. That's because the market, at its very core, is merely a hodgepodge of institutional players (hedge fund companies, members of exchanges, the specialists, the market makers etc) and retailers (the general public) transacting with one another. Whenever we talk about moving the market, we are talking about moving "people" – living things with cognitive abilities, emotions, agendas, and what have you – in certain directions. While in time, people do see the development of patterns and figure out the course the majority is taking and catch up with what they are doing, in the here and now, your guess is as good as mine when it comes to predicting the result of the collective actions of hundreds of millions of market participants (bearing in mind that just because you don’t buy or sell stocks or invest in anyway, it doesn't make you a passive observer of the market. You are, even if you don’t step out of your house, a participant in the market. Here's a simple example: when you use your handphone, you’re contributing to your mobile service providers’ revenue. Don't wish to get long-winded, guess we get the drift here) in the minutes, hours, or days, or even weeks to come.

For players using very short trading timeframes, any attempts to make sense of where the market is heading exactly in the next candle will more often than not prove to be futile. As short-term traders, in particular, daytraders and scalpers, all we can do is to make the best of what we have at our disposal: the knowledge we’ve acquired so far, the lessons we learn from on the field experiences, the skills we’ve sharpened through tireless practice, and the market signals that we pick up with all our senses throughout the day and over days and weeks (I’m not talking about the ‘tips’ you HEAR from your fish mongre..monger…I mean, although if I hear the same from the vegetable sellers too, and other fishmongers and vegetable sellers in other wet markets, and if the cab drivers are echoing a similar opinion, I would probably start digging deeper in case the ‘tips’ is indeed supported by legitimate basis).

Now that’s really a mouthful. Many, like M, would simply call the above “intuition”, or “instinct”.

If I’ve started losing everyone since paragraph 2, Brett Steenbarger, who wrote “The Psychology of Trading”, might help to clear the air on the difference between longer-term trading / investment and short-term trading and the distinctive skills required to excel in them:

"The expertise of the diagnosing physician is akin to that of the long-term investor. Other forms of expertise, such as those of the short-term trader, do not allow for the luxury of extended decision making. The fighter pilot, hockey goalie, or SWAT team member must integrate information on the fly, making critical decisions by "instinct" alone. Such instinct, however, is actually highly automatized skill. The expert scalper integrates a huge amount of information from price, volume, time of day, and shifts in the depth of market. This integration, however, is not a deliberative process. It is built into the scalper's perception."

The above is extracted from his blog entry here.

Here's the sequel where Steenbarger talks about how traders who apply the wrong skills for the timeframe they are trading or using the wrong timeframe for the skills they’ve developed are doing so at their own peril.