Exercises for Developing Intuition in Trading

There is a lot of debate regarding intuition in trading. Most agree that intuition is nothing more than an instant interpretation of previous experience at the subconscious level.

However, there are studies showing that the ability to predict the future movement of price depends on the skills of "social analysis," that is, analysis of other people's behavior.
And based on these studies, a special simulator was created to improve trading skills. We made a fully localized version of these exercises for our readers.

The text below is a translation of the introduction in which the authors explain what these exercises were created on the basis of.
You can skip this introductory part and go straight to the tests.

Traders and portfolio managers admit that some of them have an amazing talent for forecasting the direction of markets. On the one hand, this is characteristic of achieving a good result through risk management; nevertheless, traders who reach high performance most likely possess some otherworldly gift for predicting the direction of price movement.

The ReThink Group developed the The Bloomberg Tradebook Trader Exercise tool, which helps traders sharpen the skills needed to predict short-term price movements and which, research shows, possesses the power of this mysterious "X-factor." Strangely enough, studies of the human brain and behavior show that markets only disguise themselves as a game of numbers. In reality, they are a game that neuroeconomists have described as "intentional social risk."

Thus, this warm-up for traders' brains uses classic research in the psychology of perceiving social meaning. If the brain really is a bit like a muscle, then one may expect that its participation in the exercise will help direct a trader into the channel of proper thinking, thanks to which he could perform his trades better.

In 2010, The Journal of Finance published an amazing study conducted by California Institute of Technology researchers Bruguier, Quartz, and Bossaerts. By carrying out experiments on the human brain and behavior, they demonstrated that the less understood X-factor in traders is based specifically on social cognition rather than mathematical and logical reasoning. Those legendary portfolio managers and traders who give the impression of people possessing a special talent for forecasting markets unconsciously rely on cognitive empathy or, in other words, mentalization. This style of social thinking apparently is the force underlying that exceptional pattern-recognition ability that allows great traders to derive meaning from the signals conveyed through the dance of price movement.

The researchers first conducted an experiment to create this virtual market data, which included intentional buying and selling (which they unfortunately called the "presence of insiders").

They then performed brain scans to determine which parts of the brain were active when individuals considered the future development of price movement in this virtual market. In other words, the researchers determined which brain areas and structures were most involved in perceiving price movement. And finally, they conducted a third experiment that was tested for correspondence with the ability to predict the direction of price movement using three traditional tests of social cognition and mathematics.

The results of this comprehensive experiment were as follows:
1. 46-78% of the study participants quite successfully predicted the direction of price change.
2. Correct forecasts correlate with the results of two tests of social cognition, of which the classic Heider-Simmel test discussed below and used as the basis for the exercises within the The Bloomberg Tradebook Trader Exercise tool proved the most convincing.
3. The mathematics test results showed no correlation with the ability to predict price.

More than 70 years after Fritz Heider and Marianne Simmel published their classic study of the perception of geographic forms, their idea remains the most widespread study of the style of thinking known as the "theory of mind." Using geometric figures alone, they established that almost 100% of all participants observing these figures animate them and invent all sorts of stories about them. Even when the video files were played in reverse, all but two of the study participants invented detailed stories based on the movements of those figures. Or, literally speaking, they "interpreted the picture as the actions of animate beings, mainly people." In essence, Heider and Simmel successfully demonstrated that people tend to perceive the meaning of other people's intentions even without seeing their faces or the emotional coloring of their actions.
Traders who consistently and correctly predict other people's future need to buy or sell by observing the behavior of changing digital symbols demonstrate the same type of social thinking.

In fact, if we think about it, we will see that all a trader or portfolio manager really cares about is "knowing" who will pay a higher price tomorrow for what they are buying today. Forecasting price, regardless of what type of analysis the trader chooses, may look like a game of numbers, but in reality it is a game of people.

As researchers became better at studying brain activity through brain imaging and other advanced methods, it became widely recognized that most of our intellectual data processing occurs at the subconscious level. Neurologist David Eagleman, known for the television series "The Brain" (2015, PBS), stated in his book "Incognito" that "...most of what we do, think, and feel is beyond our conscious control. Your consciousness is a tiny part of what is happening in your brain... Our brain is busy gathering information and steering the ship. It does not matter whether consciousness participates in the decision-making process. And for the most part, it does not."

Consequently, traders for the most part do not truly perceive consciously that they are predicting the forthcoming perceptions of other traders when they forecast price. They quite often speak about the market in terms of human behavior: "Who is going to buy here?" or else "they are going right on our heels!" Yet most traders rather carelessly agree with the widespread misconception that their price forecasts are driven by some kind of probabilistic thinking. Despite the fact that they often acknowledge the similarity between poker and trading, the human-prediction aspect usually goes unnoticed or, at the very least, is greatly underestimated.

It is also relatively fashionable to devalue the worth of unconscious pattern recognition or felt awareness. Research in behavioral finance has persuaded us to doubt the type of expert knowledge that we usually call intuition. However, leading scientists in judgment and decision-making say the opposite: "Intuitive thinking underlies the most advanced thinking" (Reyna, 2012).

Research points to evidence that more erudite thinkers, in order to make a choice, rely on the gist or essence of a situation (essence means a deep understanding of something), rather than on a literal and word-for-word counting of factors. They extract the essence of the questions at hand rather than listing and prioritizing every possible outcome. In essence, this is exactly what the exercise is aimed at, the basic question of where price may move, as opposed to a more detailed analysis of all the factors that may influence price movement. A professional trader who listens to and analyzes his inner voice effectively gains the opportunity to track price movement over many years.

Summary

Thus, it can be assumed with sufficient confidence that participation in the “Bloomberg Tradebook Trader Exercise” program will engage the most useful neural "muscles." Conscious work based on the real skills that underlie performance, social cognition, should ultimately warm up the trader's brain in such a way as to make it lighter and more effective at forecasting the probable development of price movement. We hope you will enjoy this exercise and believe that its practical application will benefit your trading.

Sources:

So, below you see a series of links. By clicking any of them, you will go to a page with an exercise (do not pay attention to the names, they have no meaning, we left them as the authors did).

In each exercise, after watching a short video, you will need to predict the further movement of the geometric figures by choosing the corresponding option. After choosing, you will move on to the next video, where the correct movement of the figures will be shown, as well as a new question.
In each exercise there are 3-4 questions; at the end you will receive an evaluation of your answers.

You can complete the exercises in any order. I do not advise doing the same exercise 2 times in a row with the aim of getting a perfect result. Otherwise, you will simply memorize the correct answers and there will be no benefit. The whole point here is in not knowing what will happen next and trying to predict the development of events.

Respectfully, Pavel Vlasov TradeLikeaPro.ru