What Stays Behind Your Intuition As A Trader

There are about 7 billion people currently living on the Earth. Each and every single one of us has a different perspective regarding anyone and anything. Do you know why? Because everyone has slightly different past experiences and the way we see the world is determined by our memories. Without them, we don’t have a basis to compare to and without a basis to compare, we are lost. We don’t know how to feel. We perceive through association. We associate based on something already experienced.

I distinguish two types of intuition – inherent and acquired. Inherent is the one you were born with and it is the end product of hundreds of thousands of years of evolution aka trying to survive in the fields. We are wired to seek instant gratification without a deeper thought about the future consequences, we are loss averse and stubborn.

While the inherent (core) intuition is the pre-installed software, each and everyone of us is born with, the acquired intuition is the upgrade we get through life as it is based on everything we experienced. Your brain remembers everything, even if you don’t realize it. Of course you can easily recall only the most vivid memories as depending on your everyday activity the brain has prioritized what is important and what is not.

When it comes to trading or investing, there is a reason you like some patterns more than others. The question is, should you trust your intuition? The contrarian school of thought in the market teaches that you should try to fade your intuition as it usually points you in the wrong direction. This is not always the case. If you have enough experience, your intuition is your biggest edge as it recognizes combinations of patterns and factors invisible for the normal eye.

Which has stronger influence on your decision making – your hereditary intuition or your acquired intuition? For fields you don’t have enough experience with, you hereditary intuition is likely to prevail and in the many cases it will urge you to take not the most efficient step.

All of us are naturally wired to think in terms of mean reversion. This is how the nature works – everything is balanced, everything is cyclical. We tend to project the linear relationships from the physical world unto the non-linear financial world. I have had my fair share of wrong moves in the capital markets and over time I realized that mean reversion does not work for me. My experiences conditioned me to see danger or more precisely – better alternatives, where other people see opportunity. Don’t get me wrong. I am not saying that mean reversion way of thinking is wrong. There is an exorbitant number of living examples of people that have figured out how to be immensely profitable using it. I have accepted that it is not for me and decided to specilize in trend following. You just have to find what works for you. Most people find that the hard way.

Social Media and the Creation of Better Traders

Mozart has long been considered a musical genius that is born once in a 100 years. His amazing talent was recognized when he was still 5 years old. Today, there are hundreds of 3-4 year old kids that are 10 times better than the 5-year old Mozart. Today we know much more about the creation of geniuses and how to leverage that knowledge. This is why I am an optimist about the future.

Robert Fischer became a grand master before he turned 16. He was considered a chess legend at the age of 13. Today, there are hundreds of 10-11 year old kids that would kick the ass of the 13 year old Fischer. We  know much more about how to learn efficiently and how to achieve expertise in any area of life. The existence of computer simulations significantly accelerates the creation of chess geniuses.

Today we know that the grand chess players don’t really think, they react. They derive their next move from their long-term memory, which has archived millions of combinations as opposed to lesser developed players, who have to apply conscious mental effort to take a decision. The best chess players think like computers. I would argue the same for the best traders, even if some of them don’t realize it. The trading wars will be won by computers, but there will always be enough fish for the skilled fisherman.

Social media can do for traders what simulated computer programs do for wanna-be chess masters. In the 1990s, Jack Swager said that he had troubles finding true investment superstars for his Market Wizards books. Social media did not exist then. Social media is important not only in terms of its discovery function, but also in terms of faster development of talent. It accelerated the learning curve and it produced hundreds of new great traders. This process has only just begun.

Social media overcomes the geographic limits of time and space and the psychological and cultural limits of perceived status, and opens a whole new world of collaboration. Some people say that social media is noise for the real traders, who have to rely only on themselves to be successful, but as with all tools – something can be very dangerous in one’s hands and extremetly useful in another’s. You just have to learn how to use it.

The Zen-Nippon Chick Sexing School and Technical Analysis

I am currently reading ‘Moonwalking with Einstein – The Art and Science of Remembering Everything” by Joshua Foer and the book offers very good explanation of the importance of building procedural memory for pattern recognition. See some modified quotes  from the book:

  • The Zen-Nippon Chick Sexing School was based in Japan in the 1920s and offered a two-year program, which single goal was to teach how to recognize the female chicks from the cockerels. For the poultry farmers, male chickens are useless. They can’t lay eggs their meat is stingy. The sooner they can be disposed of – the better, but a costly problem has vexed egg farmers for millennia: It is virtually impossible to tell the difference between male and female chickens until they’re four to six weeks old. Until then they are indistinguishable and have to be housed and fed at considerable expense.
  • In the 1920s, the Japanese figured out a way to distinguish between male and female chicks immediately after their birth, which helped to lower the price of eggs worldwide. The professional chicken sexer, equipped with a skill that took years to master, became one of the most valuable workers in agriculture.
  • Chicken sexing is a delicate art, requiring Zen-like concentration and a brain surgeon’s dexterity. The gender of the young chick is recognized by the shape of their vent. By some estimates there are as many as a thousand vent configurations that a sexer has to learn to become competent. The job is made even more difficult by the fact that the sexer has to diagnose the bird with just a glance. There is no time for conscious reasoning.
  • What makes chicken sexing such a captivating subject and the reason my own research into memory has brought me to this arcane skill – is that even the best professional sexers can’t describe how they determine gender in the toughest, most ambiguous cases. Their art is inexplicable. They say that within three seconds they just “know” whether the bird is a boy or a girl, but they can’t say how they know. What they have, they say is intution. In some fundamental sense, the expert chicken sexer perceives the world – at least the world of chickens – in a way that is completely different from you or me. When they look at a chick’s bottom, they see things that a normal person simply does not see.

The best technical analysis experts are the modern chicks sexers. By looking at millions of charts at different time frames, they have attained the skill to recognize great technical setups from not so great ones. Their eyes see what most don’t and often they can’t even explain why they like certain chart. They just do, based on experience.