A Quantitative Approach To Intuitive Trading – Part 4/5

Maintaining intuitive calibration and controlling execution

Check yourself before you wreck yourself. Like any trading method it’s important to start each trading day with a self-assessment. This is even more important when using intuition since your state of mind can directly alter the results. From the journal or spreadsheet used to identify your intuitive trade signals in Part 3 you also should have discovered some factors that lead to poor trading. What is your mood? Energy level? Stress level? Would you rather be doing something else? Can you visualize making a great trade? What are you expecting to happen in the market? What are the other possibilities? How will you respond? What is your maximum position size? Where are your stops? Assess your preparedness and have a plan before you start. Even if circumstances prevent you from fully implementing your plan, coming up with one forces you to walk through the possibilities.

Controlling execution. The human mind is capable of coming up with amazingly complex, compelling and horribly erroneous rationalizations for virtually any action. This is true regardless of trading methodology. When at the point of making a trade the best way I’ve found to avoid self-delusion and assure consistency is to use a checklist. Make a list of what conditions you expect to accompany a good trade, whether it’s related to price, volume, breadth, time of day, options activity, or other factors. After you have a list of criteria, establish a cutoff, like 4 out of 6, to confirm the right conditions are present. Flexibility in changing conditions is the biggest advantage of intuitive trading so don’t eliminate that advantage by using an overly long checklist or restrictive cutoff. The purpose is to confirm your intuition is plausible in the current situation, not to serve as a substitute for it.

The checklist can also increase confidence and keep the naysayers in your mind in check by highlighting that there is in fact a rational basis for the intuition. Have the checklist with you at all times when a trade is possible. In evaluating the conditions versus your checklist consider whether you would tell someone you care about that the criteria are met and they should take the trade. For whatever reason fooling yourself is often far easier than it should be so invoking the consequences to someone else can help maintain objectivity.

Maintaining calibration. When you get the feeling of your trade signal, how do you know whether your intuition is still in line with the market? As mentioned in Part 1, one way to keep things on track is to keep your data inputs consistent. News feeds in particular can change with site or editorial changes so even if you are consistent on your end, your inputs may still change over time. But even assuming your preparation and current state of mind are perfect it’s still possible that a subtle drift in your intuition has occurred. Generally this happens in line with your natural market bias, whether bullish or bearish.

To keep these, and other, biases under control as an intuitive sense develops a good method is to use a variety of mechanical systems to give an objective interpretation of the market. Your intuition will likely show a preference for trades in certain types of situations and having mechanical systems for those setups provides confirmation you’re on track, or a warning that you may be going astray. In my case, this has ballooned to several hundred systems based on a variety of indicators, with multiple systems for each specific setup. The signals from these systems have become my primary way of checking my intuitive calibration. If there are a number of bottom picking systems going off and I have no feel for a trade I go back and run through all the factors I know feed into my intuitive process to make sure I haven’t ignored something, as well as check for biases that may be hampering my intuition. For example, if I’ve been reading a lot of negative news I make a point of reviewing the positive side of the situation. Similarly if I get an intuitive signal and there haven’t been any mechanical systems signaling recently it’s a warning for me to review my internal state and be extremely honest in evaluating my checklist before pulling the trigger.

If you’re inherently bearish and always find it easier to go short than long, try to develop more long-only systems to offset that bias. Naturally if you’re inherently bullish try to develop more short-only systems. One of the biggest benefits of keeping a journal of your trading is to be able to step back and see your flaws objectively so you can take steps to address them.

Maintaining objectivity. It’s very common for so many things to be going on in your head that you lose perspective and have difficulty regaining the proper frame of mind. In that case try taking a third-party perspective. It’s always easier to be objective about someone else so take a deep breath to relax, then ask yourself if a great trader would make the trade. The intensity of your answer is a good guide to the quality of the trade. Asking yourself how you will feel next year about taking this trade, or how you will feel about not taking it can also help clarify your intuition by moving the question away from the stress of making a trade in the present.

If your intuition becomes hazy when you feel it shouldn’t be, one of the best ways to stimulate a stronger response is to make yourself consider doing the opposite of what you think the situation indicates. Often that prospect will trigger a more dramatic negative response. If this happens it confirms your intuition is working properly but suggests there is some problem with the trade you are considering, whether internal or external. In my experience it almost always means the timing simply isn’t quite right and I should watch the market and wait for the signal to come. Intuition often detects flaws in a setup that the conscious mind doesn’t.

The technique of considering the opposite trade is also a very good indicator of the quality of an intuition. Good intuitions are logically consistent; poor ones generally aren’t. If you have an intense feeling you should go long but don’t have an equally intense revulsion about going short, something is wrong. This is often due to forcing a feeling that isn’t ready or isn’t valid, generally because some part of you is pursuing another agenda. Wanting to win back a loss or some other irrelevant desire can be frequent saboteurs of good trading

Though I’ve written this from the point of view of a swing trader the process is the same regardless of time frame. The steps are just condensed or diffused depending on the type of trading. Even very long-term trading, where the intuitive signal can build over a period of years, at some point results in a decision being made to make a trade and at that point the checklists and other double checks come into play the same as they would in day trading.

At this point the process may seem overly complex, with too many pieces for it ever to work. In reality most of the time it’s quite simple. A large percentage of the time you feel nothing simply because there are no good trades to be made; a small fraction of the time the intuition comes with such force and urgency it leaves no doubt whatsoever about not just doing the trade but going all in. The middle area is where all the steps outlined in this post come into play. Reducing bet size in the muddy middle is an obvious step to take, but never forget doing nothing is always an option. Under-trading may leave you disappointed, but over-trading can leave you broke.

In the last part of this series I’ll try to tie up some loose ends and cover a little about using intuition where it’s really important – life outside of trading.


The complete series: Part 1, 2, 3, 4, 5


2 thoughts on “A Quantitative Approach To Intuitive Trading – Part 4/5

  1. Pingback: A Quantitative Approach To Intuitive Trading – Part 5/5 | Mortality Sucks

  2. Pingback: Pseudo Random News and Comment | Mortality Sucks

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