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I hear many traders talking about gut feeling, especially when referring to very good traders. I hear them saying that you will, at some point, feel what the market will do next. Many explain it as a sixth sense or cannot it explain it at all. I say to them the explanation behind is a much simpler one.
Gut feeling in trading, most of the cases, is nothing else but subconscious pattern recognition. There is nothing magic here, it is simply related to how the human brain works in day to day life.
The trader looks at his screen for thousands of hours. Every day, he tries to analyze the price movements, while the brain stores the information in an abstract way into neural maps. Millions of neurons fire and wire together and create complex memory banks which include associated emotional responses. Day after day after day, this memory banks are reinforced and restructured until the neural maps are hardwired.
This process is all subconscious. The part which is even more interesting is the way the human brain retrieves the needed information stored in those complex neural maps. This mechanism is also done subconsciously and this is why many label it as “gut feeling”. So, when a trader instantaneously “feels”, in an apparently strange way, what he should do when he sees a particular market event, his brain has subconsciously identified a store pattern.
You may ask yourself: So what? What difference does it make knowing this? I say it makes. When you understand how your brain works you should also realize that you have at your disposal an extraordinary working instrument, but this will not guarantee your success by itself. Those neural maps need quality data. Programmers are accounted with the saying “garbage in garbage out”. It’s the same with the human brain.
If you don’t put true intellectual effort in your day to day market observations, if you don’t approach what you see from multiple angles, if you don’t analyze your own emotional reactions, then your neural maps will be build on superficial data. You will only reinforce all sorts of ineffective pattern recognition processes, no matter for how long you stare at the screens. By contrast, if you do it right, your “gut feeling” will evolve and become very valuable.
Evolving as a trader is not only a function of how much time you spend trying. What really matters is what you are really doing and how you are doing it. This explains why so many traders cannot become profitable even after years of trying. They are caught into inefficient and superficial ways of looking at the market.
So many retail traders rely exclusively on technical patterns. They don’t understand what really moves the markets and how those patterns are formed. They spend years and years switching from a technical indicator to another, without realizing they are unconsciously accumulating only superficial data. Some realize the trap … most don’t