‘Blink’ Your Way to Profits

If you want to make better trades, why not learn to “blink”?

The kind of “blink” I am speaking of here is a reference to Malcolm Gladwell’s compelling book of the same name. The thesis of the book has never been more applicable than when it’s focused on understanding trading psychology.

Face it, anyone with even a modicum of trading experience is all too familiar with the failure to trust their initial thoughts or instincts on a trade.

Often, we know that we waited too long and that we should have acted faster. We may ask ourselves, “Why didn’t I listen to that voice inside my head and just sell when I had those nice profits?”

If these tales of regret sound familiar to you, rest assured that you are not alone. I suspect that in this most-difficult market year, even the best and the brightest traders have experienced more than their usual share of regret.

Now, ask yourself this question: What do these regrets have in common?

The answer is that in every case, the trader failed to “blink.” Let me explain.

The essence of Gladwell’s thesis is that humans have the ability to gauge what is really important from a very narrow period of experience. He argues that spontaneous decisions are often as good as — or even better than — carefully planned and considered ones.

In the book, Gladwell — who wrote the very influential tome “The Tipping Point,” and is currently on the bestseller list with his 2008 work, “Outliers” — draws on a variety of anecdotes from fields as seemingly varied as science, fine art, advertising, medicine and even popular music to argue for the validity of his ideas.

Gladwell says that when we “blink,” we are essentially thinking without thinking. We do this, he claims, by a process he calls “thin-slicing,” which is the human knack for using limited information to come to our conclusions.

Throwing Darts at The Wall Street Journal

It’s Gladwell’s contention that in an era of easy access to boatloads of data on just about any subject matter, many times people make better decisions with snap judgments than they do with volumes of analysis.

Think about it, how many times have you failed to pull the trigger on a trade that you knew was the right thing to do? How many times have you thought your way out of an initial idea, and later found out that it would have made you a lot of money if only you would have taken action?

I suspect that the failure of so many professional money managers to beat the S&P 500 (SPX) has a lot to do with their failure to “blink.” These very smart people often reason themselves away from a good decision, and/or they let others talk them out of what could be profitable moves.

You have likely heard about those studies that show that monkeys throwing darts at the stock tables in The Wall Street Journal tend to outperform professional money managers. Well, perhaps this is because those managers fail to “blink” — i.e., they effectively outsmarted themselves into a state of paralysis.

Thin-Sliced Profits

Now before we continue, please understand that I am in no way arguing for an unthinking, non-contemplative approach to trading. I am not saying that if you feel like buying a stock, then just buy it without good reason. In fact, I am arguing for the contrary.

You see, when you “blink” you are thinking, and you are thinking with the mind’s unfettered processes. You aren’t clouding your idea that a stock may go up with reams of data that say, historically, in a particular month this stock’s shares have fallen X percent.

What prompted your original idea that a given stock may go up is, in fact, simply the process of “thin-slicing” at work.

Keep in mind, however, that it takes time and a lot of trading expertise to reach the level of competent “thin-slicing.” When seasoned traders “trust their instincts,” what we should really say is that they are “blinking.” In other words, they are going with their initial thoughts, which are based on their cumulative knowledge, their current reading of the markets and their past trading experiences.

Finally, I don’t think you have to accept Gladwell’s theories in full to understand that he’s on to something with respect to trusting your initial judgment. When it comes to making good trades, often your greatest enemy is indecision. That indecision is all too frequently aided and abetted by too much information, information that puts a sense of doubt and distrust into your initial analysis.

So, the next time you feel the impetus of doubt, I recommend you take a split second and “blink.”

Jim Woods is a Senior Editor for OptionsZone.com. To learn more about him, read his bio here.