If you want to cut through noise and self-doubt, the key is being able to know when and when not to trust your intuition, states Jared Tendler, Author, The Mental Game of Trading.

Which means you need to know when your intuition is likely to be right…and when it isn’t. Trading with that knowledge allows you to capitalize on opportunities and get out of losses more quickly. It is powerful and lucrative. 

Unfortunately, traders often get this wrong. They’ll ignore their gut even though it’s more likely to help them make more money, or avoid losses, and on the flip side, they get fooled by false intuition that leads to poor decisions. Why does this happen? A lot of it comes down to the misconception that many traders have about intuition.

With that in mind I wrote Leverage Your Intuition, a free companion eBook to The Mental Game of Trading. It details how to make intuition within trading more recognizable, so you can cultivate it and use it effectively. For many of you, intuition feels like a stranger that shows up out of the blue and you’re not sure what to make of it, so it’s easy to ignore. The problem is, it turns out this stranger has some good ideas!

Here are a few thoughts to help you become friends with an aspect of your decision-making that is widely misunderstood.

Intuition and Instinct Are Different

Even though these terms are often used synonymously, they arise for opposite reasons. Here’s the difference:

  • Intuition is based upon knowledge that is so new, you can’t explain it yet.
  • Instinct is based upon knowledge that is so well ingrained, or mastered, that it comes naturally and instantaneously.

They’re both unconscious reactions that can be difficult to explain, but intuition represents your highest levels of knowledge. Instinct represents the old, hardwired, and foundational knowledge that you’ve relied upon for years. It’s common to view traders with strong instincts as having an innate gift that doesn’t result from any training. The fact is, however, they wouldn’t be great traders without having acquired a deep level of knowledge about the markets.

Having strong instincts is critical to having quality intuition. This is why I strongly advise that if you are a newer trader, you are more skeptical of your intuition—it’s less likely to be accurate. You might have intuition for general opportunities in the market that comes from experience outside of trading, but within the trading sphere itself, intuition must start with a strong base of knowledge in order to be valuable.

When Intuition Is More Likely Accurate and Inaccurate

This is actually quite simple. Intuition is more likely accurate when you’re a skilled trader who is in the zone. For many traders, the most recognizable feature of trading in the zone is the ability to just know something is right, without being able to explain it. You have a strong feeling or a sense, and yet there isn’t logic or reason that fully captures what you sense, or why it’s right. That’s intuition.

The problem is that sometimes it seems like you’re in the zone, when you’re not. The market is going crazy and there’s a ton of activity that captures your attention and makes you feel the same kind of intensity that you have when you’re in the zone, but you lack the mental clarity needed to access intuition.

Or worse, there are times when emotions masquerade as intuition and you put trust where it doesn’t belong. Greed, anger, and overconfidence, for example, can make you think you’re justified in jumping into a trade because it’s taking off and you don’t want to miss out, or exit because you just know that it’s going to dump. That’s not intuition. Your emotions are tricking you.

Intuition’s Defining Characteristic

When I’m working with a client on cultivating their intuition, we look for the defining characteristics that help them to firmly identify when they experience intuition. The signal typically is something unique in how their mind, emotions or body reacts. For example, one client noted that it felt like several puzzle pieces were suddenly put together in his mind. Like a spontaneous “ah-ha” moment that was distinctly different from instances when he would spot other trades. Another client didn’t have that snap of clarity, but instead experienced intuition with a sense of calmness that was a contrast to the intensity that he typically felt.

How do you experience intuition? If an answer doesn’t immediately come to mind, don’t guess. Wait until the next time it happens and then take some notes down afterward. Then you’ll know what to look for and can differentiate real intuition from times when it seems like intuition but isn’t.

Jared Tendler, MS is a leading expert in trading psychology. His clients include institutional firms and independent traders from around the world. Be sure to check out his highly acclaimed book, The Mental Game of Trading. To learn more about Jared, visit his website: jaredtendler.com.