The Fuzz Factor

 One of the most maligned topics in trading is the concept of using one's "gut feel" for placing trades. It's become such conventional wisdom that it makes you want to gravitate towards it to take a closer look, since much of society's conventional wisdom often goes out the window or reverses course with time. Examples include buying a house ("The American Dream"), prioritizing saving for retirement (vs significant reinvestment into a larger goal or even charity while you're still coming up), or the impact of eating eggs every day. 

So let's give gut feel a chance at least. The first question to ask may be, what exactly is gut feel? Conventional wisdom says it's tantamount to a whimsical decision originating from one's gut. Ok, so what's a whimsical decision from a logic/mathematical perspective? Well, the implication is that it's a random decision, and therefore has no statistical edge. But when you have a gut feeling that a situation or environment isn't safe and avoid it, that is hardly considered random! Your senses and body of life experiences have pointed to an insight that is relevant, even from a mathematical/probability perspective. A simple but obvious example would be sensing danger when a group of people are staring you down in a dark alley at night. Very hard to quantify the danger and prove it (hey, they could simply be a group of friends trying to identify whether you're the last person they were expecting), but very obvious from a human standpoint that over time, this situation usually spells a certain statistically relevant increased degree of danger.

This simple observation gives gut feel legitimacy. Oh, but that may apply to life in general, but not trading decisions you say? Well when you substitute the above example with a typical trading scenario, say facing high volatility in unusually high volume, that's a computationally intensive scenario whose probabilities (of the success rate of certain types of trades) would be difficult to quantify digitally, but easy for an experienced trader to either scream "danger!" or "opportunity!", depending on their style and skillset. The net result of this scenario might either be reacting to the price action through a unique trade (say lower size + shorter time frame, i.e. a quick scalp), or complete avoidance to mitigate risk. 

This is a direct example of gut feel being used wisely, and what then gets tagged in more respectable circles as "discretion". I've extensively commented on discretionary vs systematic trading systems in this blog, but it really comes down to embracing fuzzy logic vs digital/binary logic. If a market looks "toppy" and you short accordingly, that's effectively applying a binary decision to a fuzzy (analog) set of conditions, as opposed to a binary decision based on discrete, well-defined binary conditions that boolean trading systems embrace. 

I think this topic could get very, very interesting from the perspective of actually developing a fuzzy logic-based trading system, and implementing it in fuzzy logic circuits/chips for fast execution...but now I'm delving into my next idea for a Unicorn startup (similar to how I believed FPGAs could be used for HFT back in the day before finding out that that's exactly what some people in New Jersey were doing!), which means that I must naturally stop pursuing it and get back to trading : D