This post discusses traders having two minds through a case study of a trade I made a while ago. It highlights how easily the mind can override sound decision-making.
Traders Have Two Minds
It is helpful to think of having two minds. One mind is our intuitive mind. It is our default decision-making mind. Our intuitive mind relies on the obvious, ignores probabilities, and is very quick to make decisions. Intuitive mind is self-satisfied with those decisions and it doesn’t like to be challenged! This contrasts with our second mind: the deliberative mind. Deliberative mind is what we need in trading. Deliberative mind excels with analysis. It understands probabilities. Deliberative mind is, however, slow and plodding. It is also difficult to engage. You can read more about the two trading minds in my book, Trade Mindfully.
Trading Case Study
I was swing-trading the 10-Year Treasury Note futures. The market had moved up swiftly over the past two months but the daily and weekly were showing indications of weakness. I went short as the daily created a Wyckoff UpThrust (red arrow), and the market fell. I added to the trade the next day (second red arrow), and the market continued to fall until bar A. This was the point of exit, but my intuitive mind had me hold on.
It was the right exit because we were at a point of support and the weekly was—despite the temporary weakness—in a strong trend up. I ignored all this. My intuitive mind saw the exit as lower and believed there was more profit in the trade. Although I felt some discomfort in holding the trade, I neglected these feelings. My mind didn’t want to spend the effort needed to assess the situation. It took the easy way out and told me, “Just hold the trade and see if it goes to the target.”
What Happened Next
Of course, the market didn’t fall. It backed up causing me to cover the two shorts: one at a much-reduced profit, the other at no profit.
Traders’ Two Minds: Judgement and Discipline
This is something many traders experience: their intuitive mind overrides sound judgement and discipline. The lesson here is that sound judgement and discipline are a function of your deliberative mind. What causes an undisciplined approach to trading is the reliance on your intuitive mind. Traders must make the effort to engage their deliberative mind.
And that’s not easy. Our intuitive mind jumps in with a quick and easy answer, and it seems like the right thing to do. But it rarely is.
What Traders Can Do
Here are four things you can do:
- Honor your feelings. Feelings are important. If you feel uncomfortable, find out why.
- Take a deep breath and step back from the trading situation. Pause and ask yourself, have I really looked carefully at this situation? What might I be missing?
- Take the opposite view. If you want to remain short, as in this example, look at the market situation as if you were looking for a long trade. Is the market giving enough indication that the opposite trade has merit? If so, close your trade.
- Have a checklist. A checklist forces you to look at your trades objectively. Your intuitive mind is not objective. A checklist of how you want to trade—from entries and trade management, to exits—will help engage your deliberative mind and better assess your trades.
Hi Gary,
thank you for the article. I’d disagree with explaining false judgment by workings of intuitive mind because it will mislead people. Even if consciously you didn’t pay attention to indications of strength in the market your intuitive mind was telling you the truth through your feelings. You write: “Although I felt some discomfort in holding the trade” and “Feelings are important. If you feel uncomfortable, find out why.” In my opinion listening to intuitive mind when trader is experienced is very important and the feelings one has about the trade are language of his intuitive mind.
Regards,
Rodion
Hi Rodion,
Thanks for your comments. Don’t confuse intuitive mind with intuition. Cognitive psychologists have conceptualized the decision-making mind into two fundamental parts. They call them System 1 and System 2 minds. To be a little more descriptive, I refer to them as intuitive mind and deliberative mind.
Intuitive mind—or System 1 mind—makes very quick judgments (i.e., it jumps to conclusions), isn’t concerned about probabilities, seems effortless and involuntary, doesn’t like to analyze situations fully, and tends to be attracted to the most obvious or salient characteristic and bases its decision on that. Although it is useful and efficient in routine, everyday judgements, this is just the opposite of what we need in trading.
Intuitive mind will surely mislead you as a trader. Over reliance on intuitive mind makes one highly vulnerable to cognitive biases and heuristics. There is ample research on this.
Intuition in performance-based activities such as trading is not something that arises from some sort of extraordinary psychological phenomenon or “inner sensing.” There is no evidence of this that I am aware of.
Intuition in activities like trading comes only from lots of experience in the activity, and requires much use of deliberative mind. You aren’t really “intuitive” in the sense that most people use the term. You have just seen and worked with the situation before and can recognize it immediately when it arises again.
Feelings are just additional information for the trader to assess, not “the language of intuitive mind.” I felt uncomfortable because I had experienced similar situations in the past, but probably not enough to recognize it fully when it was happening real time. And, I didn’t pay attention to the indications of strength because my intuitive mind had jumped to a conclusion. The uncomfortable feelings were signaling the need for clearer thinking and more analysis, but once the intuitive mind takes over, that gets thrown out the window.
Yes, thanks, good tips. I struggle with intuitive mind, also we can call it impulsive, although there are differences… or wishful thinking… or emotionally attached…
Hi Dusan,
Yes, all those things—impulsivity, emotion-driven thinking, wishful thinking—are characteristics. The key thing to note about intuitive mind is that it leads us to short-circuit decision-making and it’s difficult to recognize it happening. If you feel like you should jump into (or out of) a trade because you see the market suddenly move, it’s impulsive and is your intuitive mind latching onto the market movement and telling you to act. Same with emotions and wishes. These are not the stuff of good decision-making in trading.
Dear Gary,
thank you for the explanation. I think I shall read your book )
Regards,
Rodion
🙂
Dr. Gary, I started reading your book “Trade Mindfully on page 17 where you discuss Intuitive and Deliberative Thinking with the examples of the ball, bat, and widgets sure I did both example and they were wrong to my surprise, but after reading and going over them again I was able to get them correct.
I have notice how much I use my Intuitive mind with my trading and the effects it has had.
One thing I have notice is with the Intuitive mind one is very impulses: where as the Deliberative mindset is more on planning,detail, and analytical am I correct on that?
Thank You
William
Good comments, William. Thanks for these.
Yes, you are correct. Intuitive mind is impulsive. It is quick to act and ignores important information. I think of it as a sort of “out of the frying pan and into the fire” aspect of our mind, as listening to it can rapidly get us into difficulties. Remember that in everyday situations, our intuitive mind can be helpful and efficient. It’s in situations like trading where we need analysis, planning and attention to details where intuitive mind fails us. These are the domain of our deliberative mind, and this is what is needed in trading.