Should you — or your clients — trust your gut when trading?

According to a recent study, traders who are more in touch with their bodies' messages — their pulse rate, in particular — are actually better traders than those who aren't. Should advisers follow that advice? The study found that traders who were more aware of physiological signs, such as heart rate, perform better in studies of risky decision-making. They also lasted longer on their jobs on the trading floor. The study begs the question of whether listening to your body — gut instinct, as it were — makes you a better trader? Traders have long claimed that a gut instinct led them to make a winning trade or close a trade before catastrophic losses. Jesse Lawrence Livermore, normally a highly methodical speculator, tells several stories of hunches he played successfully in the classic Reminiscences of a Stock Operator. “I had always made money following my hunches,” he said, describing a decision to go heavily short on Union Pacific stock. Should you follow your gut? Probably not, advisers say. Traders and advisers often have different goals for their clients. And trusting your initial instincts can be terribly misleading. “I've had those moments of anxiousness which could be opportunities, or something to be concerned about,” said Ray Ferrara, a financial planner in Clear Lakes, Fla. “When those happen, I like to apply the Ferrara 48-hour rule: If you feel that way 48 hours later, you need to have a look at what's causing your problems. Of course, one of the best skills on a trading floor is not to get overly excited in trying times, which is typically what individual investors do when they make the wrong decisions. “Increased body awareness can also be associated with an enhanced ability to calm down physiological arousal to keep the pre-frontal cortext engaged to override 'gut impulses,'” said Dr. Brad Kloontz, managing principal at Occidental Asset Management. “So the better trading results could actually be the result of an enhanced ability to not give in to 'gut impulses.'" "The question is why might 'gut' be a viable criteria," said Harold Evensky, a financial planner in Coral Gables, Fla. "I can well believe that 'gut' feelings might provide some insight that is fundamental as it actually reflects the traders' unconscious but experiential knowledge. Having said that, I remain skeptical that even with that insight, active, short-term trading can, over time, net of costs, add value." George Soros, the famed hedge-fund manager, claimed that his back acted up when something wasn't right with his investments. But the notion that his back pain reflected bad investments might be putting the cart before the horse. “I'm sure it heightened his awareness to search very closely in his portfolio, where there would always be holdings that were not doing as well as others,” Dr. Klontz said. “He would find them, confirming his back pain equals portfolio problems. With all his success, I can only assume he is a chronic back pain sufferer."