If you’ve ever been present when a market newcomer is learning to trade and asked them if they think the price of a market is going to go up or down, they might be willing to offer an opinion. But when pushed on the logic behind their answer, it could simply be a “gut feeling”.
So who is more likely to go with their gut on trading decisions - less established, or more experienced investors? While there is no ‘one size fits all’ answer to this question, experienced traders and investors have usually earned the mantle of being ‘established’ because they have survived the trials and tribulations of the trading learning curve. They have made mistakes, learned from those mistakes and developed an understanding of a trading or investing philosophy, which they follow rigorously.
Experienced traders will know it’s important to follow the rules they have established for their trading plan, and are highly disciplined about sticking to this approach.
By contrast, new-to-the-market traders may be more likely to follow gut instinct. The saying, “never underestimate someone’s belief in their own luck” applies here, especially if a new trader has made some early profitable trades.
However, it’s not just new traders who sometimes cite a ‘sense’ of being able to predict a change of direction in the markets. You can come across people who have spent a number of years trading the markets and claim to feel as if they are aligned or in synch with them in some way. Indeed, experienced traders may start to get a feeling for the ‘ebbs and flows’ of a market’s momentum and movement.
But this tends to be manifested in the timing of a profitable exit, especially when there is already sizable profit in the trade and the trader is ‘scaling out’ little by little. This is very different from using ‘gut feel’ to justify entering a brand new trade when there is no clear trade set-up evident.
Some people – especially those who have a strong ego – can often develop a deep belief in their luck. But ‘being lucky’ really has no place in a professional trading strategy.
One of the worst things that can happen to a new trader is when they go with a gut feeling, and the trade moves in their direction and becomes profitable. This gives the trader a false sense of encouragement, as they achieved a profitable outcome without following a pre-determined strategy.
If the trader then continues to go with their gut feeling, and doesn’t develop and follow a definable step-by-step repeatable strategy, their chances of placing successful trades long-term are more likely to be limited.
Following gut feelings might also encourage a trader not to use a stop-loss because ultimately, they believe in the likelihood of their eventual success. These traders might be prepared to take what they may see as short-term pain for long-term gain. This means that they could hold on to losing trades for much longer than a seasoned trader would.
More advanced traders will generally follow a definable, repeatable strategy. This negates the potential for trading on gut instinct, which in turn could mean emotions playing a large part in how the markets are viewed on any given specific day.
A well-known truism of trading is: a trader should adapt to the market; the market doesn’t adapt to them – no matter how good their trading poker face is.
CMC Markets is an execution-only service provider. The material (whether or not it states any opinions) is for general information purposes only, and does not take into account your personal circumstances or objectives. Nothing in this material is (or should be considered to be) financial, investment or other advice on which reliance should be placed. No opinion given in the material constitutes a recommendation by CMC Markets or the author that any particular investment, security, transaction or investment strategy is suitable for any specific person.
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