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This post continues the discussion on finding the Art in technical analysis. Read that first, and also this post, on bringing broad intuition into your experience. For quantitatively-inclined traders (such as myself), discretion can be a problem. First, many system rules are slightly counter-intuitive (which may be why they work), so system traders often find that when they use discretion they are, quite consistently, doing the wrong thing–you will, so often, tend to skip the best trades or get out of winners early. There is also the problem that discretionary elements are almost anti-quantitative: we can’t backtest them (though we can analyze the result of discretionary decisions on a walk-forward basis), and they seem to resist being quantified. It’s very hard for traders to live in both quantitative and discretionary worlds at the same time, but, for those who can, the rewards can be tremendous.

I’ve written a bit before on how to bring intuition into other aspects of your life. Today, I want to give you some concrete ideas for bring intuition into your trading.

1. Be open to the experience of intuition. As I wrote in this post, there are many things you can do to bring intuitive experience into your every day life. Mostly, these revolve around the theme of being open to the experience of intuition–as much as anything, it’s a mindset, and doing some “crazy things”, walking a bit out on the fringe of rationality, may be helpful. This makes sense, because intuition is another way of using our brains; intuition is not rational. Be willing to be a little crazy, at least for a while.

2. Watch for standout moves on markets you follow. We could quantify these, but what you are really doing is looking for something that would stand out to even an inexperienced chart reader. If you have to go looking for it, that’s not what we are talking about. Think about the uptrending stock that has a large, sudden down day, or a quiet market that breaks out of consolidation with a very strong thrust. If we were quantifying, we’re talking about 4 sigma or greater moves here. First thing is to look for these large, standout moves.

3. See what happens after these large moves. Here is where some discretionary elements can begin to come more into play. If the market has sold off sharply (in an hour, a day, two weeks… you can adapt this for your timeframe), how does the market bounce? Does it bounce strongly? If so, what happens after that bounce–quiet and flat, or does the market nearly immediately turn lower? If so, how does it act around that previous pivot low? If it does not bounce strongly, how does it consolidate? Is trading continuous or discontinuous? What are people saying in the media? Do you have friends or know people on social media who are very consistently wrong? What are they saying? (No joke.) Now, we’re not totally in “crazy land” here because we can use our quantitative knowledge to help. For instance, we know that mean reversion is much strong in equities than in currencies, over some timeframes, so might we evaluate this action differently in currencies and stocks? These are the types of questions to ask, but it basically comes down to evaluating what happens after a sharp thrust.

4. What is happening on lower timeframes? I think a lot of traders get in trouble using multiple timeframes. True, there is power in these techniques, but it can often lead to analysis paralysis, and most traders would probably be better checking in on their positions less frequently. However, when we are trying to get a read on a market intuitively, looking at lower timeframes can be very helpful. If I am holding a position based on a weekly pattern, how does the market react to small intraday shocks? Now, it’s important to avoid acting on that information (too many long term traders have exited positions because of something silly like a five minute trendline being broken), but this is another layer of information that can help to build your intuitive read on the market. ((Also, this must be put in context. Say, for instance, a market has been hit hard, bounces, turns lower, and is now working around that previous pivot low. (Chart readers might be looking for a double bottom, for instance.) Intraday, I would expect to see the market “goes down a lot easier than it goes up”, and that downward shocks have a much stronger effect on the market. This is reflective of bearish sentiment and conviction, and is probably what we would expect. Now, what if I start seeing selloffs absorbed, or even large upward shocks on these lower timeframes, and what if this coincides with a failure test on the daily chart? That’s a much more powerful signal, in context, and would further strengthen the intuitive case for reversal.))

5. Watch action in consolidations. This is a slightly different context, but there are times when we can get intuitive reads on the direction of breakouts from consolidations. I’ve kept careful records and seen that I do seem to have a slight edge over chance, but, for me, it’s not worth it and it’s too much work. I almost always will wait for the breakout and then work in the new momentum following that breakout, but that’s a style decision driven by me personality. For you, the answer may be different. I mention this here just to show that there certainly are other aspects of market action where intuition can be useful. I think the “pullback” scenario is probably the easiest, but there are many other places where intuitive inputs can be helpful.

This stuff is hard to teach, hard to write about, and almost impossible to nail down; your own experience will be your guide and teacher, and you must open yourself to that experience. If you are going to explore intuitive elements, my advice would be to make sure that this is not all you do. Many developing traders think that intuition is the answer to all their problems, and that simply is not true. Continue to work on discipline. Work on doing hard research and understanding market action. Question everything. For me, it works out well for me to almost have a split personality: the hard-core data scientist on one hand and the slightly-crazy-at-times intuitive. Sometimes they have arguments, and that can be interesting, too.

I’ll write a bit more next week with a few more ideas to extend this discussion.