Gut Feel: That something special of Successful Traders Published onJuly 28, 2017 Steven Goldstein Performance & Executive Coach, Organisational Development Consultant specialising in Financial Market Risk Businesses. The Trade It was 1:30pm on Friday 11th May 2007, I was at my trading desk at American Express Bank in London, awaiting the release of US GDP number. I had no position going into the release, and in terms of my P&L for the year, I was deeply ‘in the red’. Twice in recent weeks I had entered the market on the short side in Bunds Futures, twice I had stopped myself out. Nonetheless I was still looking to short Bunds, my view was built on what I felt was potentially a great risk-reward set-up. Whether it would pan out as anticipated was another matter, in markets, nothing is given and nothing is certain. The US GDP release was significantly weaker than expected. Bunds at the time were closely correlated to moves in the US 10 year note futures, and this data release did little to support my view, initially sending US T-notes, and Bund Futures higher. 10 minutes after the release however, the futures had stopped ticking higher and started ticking back down. The initial jump higher on the release was less spectacular than the disappointing data warranted, and quickly reversed. This now had my attention. I waited and watched. The market continued to tick lower, at first just gradually, but then it started to gather speed. This was odd, highly odd, but not without precedent: The market does this sometimes, it tests itself, revisiting a level or a point in time where it flushes out weak hands, and then charges forward with renewed vigour. Instinctively I started selling Bunds, and relative to my trading limits, started selling aggressively. On this occasion however, I don't know why, but it felt different. Instinctively I started selling Bunds, and relative to my trading limits, started selling aggressively, not my usual 'nickel and diming' size, but something more meaningful. Amex was not a large trading business, risk tolerance was low as the business was mostly a sales and fee based institution. My limit equated to risk equivalent to around a 1200 bunds, not insignificant, but rarely, if ever, fully utilised. However, on this occasion I was very quickly short 600 lots, the market drop started to accelerate and I continued to sell, soon I was up to 900 lots short. I then paused for reflection: I looked at my levels, I checked my longer-term charts, I read back over my journal notes from recent weeks. I checked the market volume, it had been huge on the selling, but not on the initial buying after the release. For the first time, I started to become conscious that the move I had felt was possible, may have started. - Now, my intuitive gut-feel responses, and my more conscious thoughts started to merge. The story was piecing together, the dots were being connected. However, it was my gut-feel/instinctive reactions which had alerted me to this, and meant that I had put myself in a very strong position. As the afternoon unfolded, I increased my position further, pyramiding into until I had my full VAR limit on, about 1200 lots. I was also able to borrow some more VAR from elsewhere, as long as this extra was executed in options. At the start of the day I was negative P&L for the year $600,000. By the time I left the office that afternoon, this had mostly been erased. Over the next 3 weeks, this trade continued to move sharply in my favour, I felt incredibly comfortable riding the trade; though always minfdul that a plate of ‘humble pie’ with my name on it was waiting for me the moment I become too cocky. But neither did I feel the anxiety I sometimes felt when running risk. - I had a trade plan, I had an exit strategy, and trailed my stop sufficiently far away to allow for increased volatility. By the end of the month, my P&L on this trade was close to $3 million. In a little over 2 weeks I had gone from deep in the red to exceeding my yearly budget target. I booked my profit on the trade and went flat. Bizarrely, being out the trade felt more uncomfortable than being in it. I was concerned that I was leaving more money on the table, a fear which ultimately proved unfounded. Gut feel – A rational process!!! Eventually you start to recognise signals that may be unique to you in particular situations. The purpose behind writing my account of this trade, is to highlight the role of gut-feel in the trading process, and to add some additional insight to this fascinating subject. Gut-feel, intuition, emotionally driven decision-making, deep knowledge, or however it is described, does not come from nowhere, it is itself is borne of some sort of logic, rationale and reason. - At the time of that trade, my innate senses had been fine-tuned by more than 20 years working in the markets, much of the time spent on trading desks at Credit Suisse and Commerzbank. My experiences had no-doubt sharpened and refined my senses, and in addition, I had worked with and learned from many fine traders, people far more competent and capable than myself. - Over-time your senses become attuned to the environment you are in, your responses and your self-awareness become finely calibrated to reading the neuro-chemical reactions occurring inside your body from external stimuli. Eventually you start to recognise signals that may be unique to you in particular situations. This, together with a robust and solid process, synthesises in moments such as those described above, when one is fully in-tune with the market, and ‘fully present’ in one’s work. - At times like these, you are able to connect the ‘unconnected dots’ that fraction of degree quicker than most of the rest of the market. These days I no longer trade, at least not for a living, but I do interact extensively with traders through my work as aperformance coach. My interactions with hundreds of traders and investors from across the spectrum of risk types, roles and functions, and hearing their stories, has made me even more conscious of how much gut-feel or intuition is a vital part of people's process. The manifestation of 'gut-feel' in trading and investment varies wildly and in different ways. The general perception, that ‘seat of the pants’ type traders are the main beneficiaries of this, is in my opinion a gross over-simplification of a complex topic: By way of an example, in a recent conversation with a client at a large hedge fund, he had refused to accept that gut-feel or emotions played any part in his work. However, as our discussions unfolded, and we explored how he worked and applied himself, he gradually started to appreciate the impact that emotions exerted on him, and how they influence his decisions in his work. – His process involved working with analysts and quants to scan markets/data to find ideas. They would then create models and systems to trade and manage risks based on these ideas. As we discussed how he generated ideas, he realised that gut-feel and intuition were part of this process. When he 'felt' that something was not right about the analysis, and when he ‘felt’ something was worth investigating, the word ‘felt’ betrayed how emotional input was a vital part of his process. He would also ‘sense’ when things needed recalibrating or modifying, and sometimes just ‘felt’ something was wrong, though he could not put his finger on the reason why. On the contrary, often the 'gut-feel' behaviours of the 'seat of the pants’ traders owe much to an inherent logic, and a process, which though appearing undefinable in real time, has many repetitive characteristics. Conclusion Warren Buffett summed it up perfectly when he said, 'Investing is not a game where the guy with the 160 IQ beats the guy with 130 IQ, it's not Rocket Science'. A recent study by a group of researchers fromCambridge University, suggested that ‘Gut feelings’ play a key part in successful financial trading. However, many remain distrustful of 'gut feel', ‘intuition' and ‘emotions’, preferring to fall back on intellect and analysis. It is worth remembering that the data, news, and price action available is also being read and processed by thousands of other equally capable, smart and intelligent people. At that point, there is little advantage from raw data and accessible information, but there is an advantage from 'deep knowledge' in the form of ‘gut-feel’, or instinctive behaviours. Trading and investing, are as much behavioural and emotional activities, as they are intellectual ones. Warren Buffett summed it up perfectly when he said, 'Investing is not a game where the guy with the 160 IQ beats the guy with 130 IQ, it's not Rocket Science'. https://www.linkedin.com/pulse/gut-...VV0wTCg&fromEmail=fromEmail&ut=1Ck2RjcOwxX7Q1
If the "gut feel" is so important, why do we see a sustained move away from actively managed funds towards passive index funds, and away from human traders towards algorithmic trading systems?
I'll play devil's advocate to an extent. Consider the question from the contraposition: If "gut feel" is not important, then why is it that we see so many firms not performing as well as before?
"Gut feel" is instincts which come from experience from which (hopefully) we learn from our mistakes. But yeah, when you've watched price development for years, you have a pretty good idea what happens next. But it's a good idea to build those feelings into your trade plan rather than sit there and improvise.
Some famous trader guy (don't recall his name) said something like this.... "If you get a gut feeling about a trade.... (1) get up away from your screen, (2) walk over to the nearest door, and (3) beat your head against the jamb as hard and for as long as necessary until the gut feeling goes away". Logic and discipline win the trading game. Nothing else.
SoesWasBetter 547 Posts 188 Likes Twitter a complete waste of energy . Apparently posting 95% winners realtime is not sufficient to attract any attention. Thus. I retire from posting. Withdrawal will not be easy, but within a week, I'll be cured. No need to comment, the iq here isn't much better . #36 Jul 27, 2017 Last week you were hitting 95%...you slipping?