Following Your Gut Feeling When Trading – Yes or No?

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Following Your Gut Feeling When Trading – Yes or No?

• Should you trust your gut when trading?
• How can you create well-informed intuition?

In one of our previous articles, we highlighted the importance of having a Trading Plan and why it is a key trading requirement.  

However, research commissioned by the University of Cambridge showed that traders tend to be more skilled than most when it comes to reading their gut feelings. The better they are at identifying their gut feelings, the more likely they are at making money given they will be the only ones who can spot an opportunity in the financial market.  

Should You Trust Your Gut When Trading? 

A lot of factors play a role in this. Such as: 

1. Experience

The main factor when deciding whether you should trust your instinct in making a move or not in the market is your trading experience. If you are just starting out, just stick to your trading plan. Experienced traders know the market inside out, know its patterns and its behavior. They are better equipped to make an intelligent move.  

According to Psychology Today, ‘Intuitions, or gut feelings, are sudden, strong judgments whose origin we can’t immediately explain’.  

An interesting neuroscientific study found out that intuition is, ‘a fast, automatic, subconscious processing style that can provide us with very useful information that deliberate analysing can’t’. 

The importance of experience, long periods of trial and error and testing behavioural patterns, both in life and when trading is a core component of cultivating a well-informed gut instinct.  

2. Ability to distinguish between intuition and impatience/delusion

It is important not to confuse undisciplined trading with intuition. Some traders may feel impatient and enter a trade prematurely, blaming it on a feeling. They might stay in a trade too long, hoping that it will work out if they just wait it out. 

Confusing intuition with either impatience or delusion will result in losses. Be honest with yourself, learn to evaluate your feelings and take the right actions based on knowledge instead of a mere feeling.  

3. Your Trading Past

Another factor influencing your intuition is how you develop it. If your trading experience consists of blindly placing trades without having a strategy in place, then your gut instinct cannot be trusted.  

Can You Create a Well-Informed Intuition? 

Tying in with previous points, looking at past trades and assessing them is one of the ways you can train your gut instinct. 

Backtesting allows you access to years of trading experience in a short amount of time, giving you confidence when trading. If a trade looks great but your intuition is telling you otherwise, then it is best to exit it.  

Tracking and keeping a record of your trades will also give you the confidence and knowledge you need for your future trading decisions. Taking screenshots of your trading behavior and referring to them when feeling indecisive allows you to see the validity of past judgments and prevents you from making the same mistakes. It will also help you learn when you can trust your intuition and when best to stick to your trading plan. 

Introspection is a crucial aspect of nurturing a good quality of life. It also plays a central role in trading. Talk to yourself and record your feelings before, during and after a trade. Compare your emotions to the actual outcome of the trade. How reliable is your gut? 

I hope this article will help you pause and assess the next time you place that trade based on a feeling, resulting in hopefully more effective trading behavior.