A great trader is one who has the uncanny ability to predict price action based on the behavior of other market participants, particularly other professional traders. Is that skill analytical or intuitive? http://aroundwallstreet.com/2013/10/intuition-and-impulse-in-a-great-trader/

1. Intuition and Impulse in a Great Trader
by Stephen Bornstein
October 2, 2013
What makes some tradersstand out can also bring them down
A great trader is one who has the uncanny ability to predict price action based on the behavior
of other market participants, particularly other professional traders.
Is that skill analytical or intuitive?
For the past several years, neuroscientists interested in this question have been developing
brain-imaging experiments designed to answer it. One study in particular1
– Exploring the
Nature of ‘Trader Intuition’(http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1530263)–traces
that skillto what the researchers call Theory of Mind (ToM). In brief, ToM is the uniquely
human ability to read intentions (or goal-directedness) from patterns observed in one’s
surroundings. Simple examples are behavioral inferences from eye expression, moves of an
opponent in strategic play or a faux-pas.
Reading the Market
Top traders tracking price movements (and other price-sensitive developments) intuitively
recognize market patterns that dictate the timing and size of their trades.Surprisingly, the
experiments show that ToM is not correlated with mathematical or logical reasoning and that
superior trading intuition is consequentlynot attributable to excellence in abstractthinking.
The laboratory research on ToM also indicates that the region of the brain involved in pattern
recognition (paracingulate cortex) applies not only to interpersonal interactions but also to
patterns in large-scale, anonymous social structures like the stock market. This finding itself is
logically inferable from the fact that reading the mind of another person and forecasting price
changes in the markets both involve detecting intentionality in one’s environment (from
multiple sources in the case of the latter).
1
Swiss Finance Institute Research Paper, Series No. 10-02, authored by Antoine J. Bruguier, Steven R. Quartz and
Peter Bossaerts, all of the California Institute of Technology (2010).

2. Since the markets are double-sided, competitive environments, every trade is ipso facto a zero-
sum game and every trader is bent on winning it. However, even great traders have very bad
days, and what ToM also reveals is that the need to prevail on every trade brings out other
innate patterns in the behavior of the trader that stand in the way of success. In other words,
the same skills that distinguish top traders also expose their greatest weaknesses by evoking
their deepest feelings when faced with risky decisions in the midst of uncertainty.
A Self-Development Game
According to Denise Shull2
, a New York City neuroeconomist who coaches traders in achieving
and maintaining peak performance, trading is actually a “self-development game.” What she
means is that the competition inherent in the trading process brings out the psychological
issues a trader has been wrestling with since childhood. For example, traders whose instincts
are to “fight the trend” in prices commonly reveal a need to provehow smartthey areto
someone influential in their past.
Acommonpathology even among great traders is the “make it, give it back” syndrome. A
trader’s reaction to a sizable trading loss or error is rooted in how the trader dealt with
problems when he or she was a kid. After a bad day in the market or a miserable night at
home, a trader may try to overcome his or her frustration by resorting to “revenge trading” --
building up an uncharacteristically huge position or executing a rapid succession of trades that
give him or her the euphoric feeling of being in control again. Shull refers to these emotional
outbursts as “trading temper tantrums” which, in her view, are bound to fail. She also says that
virtually all traders fall prey to them at one time or another.
‘Fear of Future Regret’
While Wall Streethas traditionally admonished traders to keep their feelings in check,
neuroscientists have shown that no decision is ever made without emotion.In trading, the
spectrum of feelingsranges from panic to fear to confidence to overconfidence.One
pervasivetrading fear, the “fear of future regret,” presagesmissing out on a profitable
opportunity that competitors exploit (or falling for a losing trade that others avoid).This
apprehensioncan be exacerbated by unconscious memories of pastlife disappointmentssuch as
getting bad grades at school or being cut from the football team. One of Shull’s clients, for
example, came to realize that he approached trading the same way he played rugby, trying to
barrel through the market andending up with positions that later turned out to be too big. The
2
Denise Shull is founder and president of The ReThink Group of New York City and author of Market Mind Games:
A Radical Psychology of Investing, Trading and Risk(McGraw-Hill 2012).

3. fix for himwas to imagine the light touch he applied when play-wrestling with his two young
daughters on weekends.
Broccoli Florets
Shull says trading behavior is actually ‘fractal,’just like many elements in nature. She bases
hercoaching on the notion that a trader’s decision-making processresemblesthe mental and
emotional patterns he or shedeveloped at an earlyage (think of broccoli florets or nested
Russian dolls). In her counseling sessions, Shull focuses on traders’ reactions to earlier
syndromes in their lives that inform and condition their trading behavior. Once she gets a
trader to realize the self-similarity of what he or she is acting out, she can then help the trader
formulate a strategy for separating impulse from intuition and neutralizing self-destructive
behavior.
In Shull’s view, “nothing is more important to a trader’s long-term success than confidence. It’s
undermined when the same mistakesare made over and over again, even if the trader’s overall
performance is positive.To have the discipline necessary to make optimal risk decisions in the
heat of trading, traders canbenefit greatly from appreciating the deep connections between
their current emotions and their past behavior.”
TAGS: TRADER, PRICE ACTION, INTUITION, THEORY OF MIND, PRICE MOVEMENTS, PRICE
PATTERNS, PATTERN RECOGNITION, INTENTIONALITY, DENISE SHULL, FIGHT THE TREND, MAKE
IT, GIVE IT BACK, REVENGE TRADING, NEUROSCIENCE, FEAR OF FUTURE REGRET, FRACTAL,
DECISION-MAKING, SELF-SIMILARITY, CONFIDENCE, RETHINK GROUP