Should You Listen To Your Gut?
By Cliff Clark
You hear it all the time. Listen to your gut, gut instinct is very reliable. Is that really true? In primitive times perhaps it was, when we operated from the primitive ("reptilian" ) brain. In those days we were just worried about survival and nothing more.
Today our brains operate on a much higher level. We have the ability for thinking and
reasoning.
Thinking and reasoning are two mental processes between which a key difference can be discerned. Thinking encapsulates a large arena of thought production that can either be conscious or unconscious. Reasoning on the other hand is limited to the conscious production of mental thought with the use of logic. As you can see from the definitions, unlike reasoning, thinking is not always logical, nor is it conscious.
Everyone thinks, however much of our thinking is reactive, biased, uninformed and often prejudiced. This is what gets in the way of gut instinct. You get into a trade and the thinking starts, you think it's from your gut. The market pulls back, your thinking tells you to sell and get out of the trade. The market reverses and goes higher. Was it your gut or your thinking that did you in.
A better way, at least while you are learning to trade is to use reasoning. Trade with a logic based system that is defined in a trading plan. Develop the discipline to stick to that plan and over time you will develop a profitable system.
While it would be nice to think that we can trade on gut instinct it's not realistic for most of us. I believe it is possible but it takes a lot of training. I hope to one day write a more informed piece on trading from the gut. But as of today I haven't quite figured it out so I'll stick to my trading plan, it has served me well!
2 trades for me today with +1.5R total
1st Trade QCOM +2R
148.39/149.97 exit 143.25
12% gap down under pivot support and 50ma after a strong daily double top rejection,. I took it on a congestion breakdown with a fairly wide stop, leaving my 2R target 50c over its ATR, slow but consistent move down with great RW, hit my target on the penny before it bounced.
2nd Trade AQB -0.5R
9.40/9.70 exit 9.56
I rarely trade stocks under $10 and even more rarely short them. I liked this daily chart as it broke its uptrend channel and stayed under a strong 9.50 support line enough room to its daily 50ma. I entered after a pullback with a fairly wide stop but only 1/3 of its ATR used at the time. It failed to break down with the strong market open and stayed in a narrow range.
I actually broke my plan with this trade as I lowered my stop to a pivot where price made a big bounce earlier at 11am with a large seller sitting there. My thought was that if it breaks that level again then it will likely...
1 trade for (-1R)
I took a BD on QCOM. I was worried about the target being close to the daily range, so I took a tighter stop on the 2 min chart. I am looking through PTS right now, most of the examples have 2 options for where to put your stop. It looks to me like one of the stops would be at the bottom of the main consolidation area, and the other at the bottom of where there has been a shakeout or turnaround bar (if there has been one). Due to the daily range I took the tighter one on this. In hindsight it seems obvious to take the wider stop, but in the moment it looked ok.
I was then looking at the 15 min 3BP on QCOM, but the reason I used a tighter stop in the first place was because of the range. The 15 min 3BP would have needed to have gone even further than the wider stop on the 2 min BD, so I didn't take it.
