You probably encountered a situation when some experienced traders make a trade but wouldn’t be so swift to explain their reasons behind the decision. Professionals would often be presented with two similar trading setups, but they would confidently choose one over another, still not always be able to explain why.
The point here isn’t “how come pro-traders have no idea why they enter the market,” but rather there is a specific factor that makes top traders stand out from the crowd. The factor enhances all aspects of a trading system: win rate, risk management, and average gain.
What is this hidden ability that makes so much difference in one’s trading results? They call it intuition, gut feeling, instinct, or even simply “experience.”
When you hear about gut feelings in trading, the source would usually be related to discretionary trading. If you’re one of the discretionary ones, you want to develop your trading instincts as they are the ultimate edge of any non-algorithmic trader.
Below are the five ways to develop your gut instincts in trading.
#1. Reliable trading strategy
Some traders seem to trade freestyle – their trading setups don’t really look repetitive and may even be drastically different at their foundation. Say the same trader may execute mean-reversion trades as well as breakouts. While few traders have been trading like that since the beginning of their career, it doesn’t mean they never had a framework – the trading plan.
A trading plan provides the vital starting point to preserve the capital and learn about the market, building a foundation for intuition. The market is too complex to trade without any restraints, so you need a framework to remain in the game and stay sane. Make sure you have a clear, detailed trading plan that you tested and are confident in.
#2. Mechanical rules
Your strategy must include a defined set of mechanical rules, at least at the beginning of your trading career. Why is it important? When we do something repetitively, it becomes easier over time.
Eventually, if you execute the same rules numerous times, it won’t take much of a mental effort to follow them. Instead, more of your brainpower will be available to process other market data. Thus, over time, you will start noticing little details, previously unseen, about the market relative to your rules.
For example, if your mechanical rule is to enter the market when you get a Moving Averages crossover, you’ll discover specific ways how the market behaves before the crossover. Next time, when the crossover is about to happen, but the market is acting drastically different from what you’ve observed numerous times, you might feel that “something is wrong” and skip the setup, thus utilizing your instinct.
You might not be able to explain what exactly turns you off in that particular setup due to the complexity of the market information that your mind processed instantly. However, your mind will give you the deep analysis’s outcome in the form of the “gut feeling,” which you can use to make decisions.
Mechanical rules help us understand patterns in the market by giving us the framework to assess the market orderly. The mastery of pattern recognition is one of the factors that define successful traders. Yet, even the best traders start off from the most basic set of variables and build on them along with getting more experience.
Your success in trading will depend on how well you manage to establish the right habits. Following the rules consistently takes enormous motivation in the long run. It’s incredibly hard to rely only on willpower to build the lasting habit of staying disciplined in trading. Your mind will play games with you, constantly tempting you to deviate from the rules, especially when you feel strong emotions.
One of the best ways to get motivated to do something is to use social pressure. You need to have someone to hold you accountable. The person must be somebody you respect and trust. Be humble and ask them to help you to establish a new habit.
Once a week, you will tell them whether you followed what you claimed you would. It’s better if your accountability partner sincerely cares about your commitment. Such a person can be your spouse or best friend.
#4. Quiet mind
Mindfulness is crucial to exercise your gut instincts. Imagine if a runner had to run a sprint right after eating all sorts of heavy, fatty junk food. What’s more likely to happen: them finishing first or throwing up in the middle of the race?
The same goes for performance in trading. The mind can’t work at its full capacity, carrying the baggage of distractions or side thoughts. Nowadays, it’s challenging to stay focused, as we’re constantly bombarded by notifications, entertainment, and instant gratification. Thus, when you’re trading, quit chat rooms, turn off notifications and ditch social media.
To step even further, to use the newly created vacuum in your mind, learn meditation to improve your focus, patience, and discipline.
If you follow all the steps above, you’ll still need some time and consistency to grow your skills and experience regardless of how hard you try. Don’t force it, or you risk seeing things where there aren’t any! Instincts aren’t a skill but a natural stage in a trader’s development.
While you can do everything right, it takes time for your mind to absorb all your trading experiences and process them into instincts.
The foundation of developing gut instincts lies in consistency and time. You’ll achieve the first one through a clear trading plan and its solid execution. Secondly, your mind requires sufficient time and a consistent mindful state to transform your experience into intuition.