Trading from your gut

Had a great end of week up in Flagstaff. The 7000 foot elevation simply makes for an incredible Arizona climate.

I spent most of the week working on my dissertation and avoiding trading. Needless to say, the first part of this week had me seriously bummed, but for the most part I managed to put it out of mind and concentrated on getting some research done. I think I may finally have an idea for a topic, but it is going to take quite a bit more legwork and input from my committee before I know for sure.

Friday night I found some time to hang out at Barnes and Nobles and after wandering around aimlessly for a bit, I decided to check out the local trading book offerings, thinking maybe I could find the book Scott mentions on his blog ('The Strategic Electronic Day Trader'), or perhaps another classic. Heh. They must of had over 200 different titles on trading, all but two of them having to do with the technical aspects. I picked up the two and sat down with a Tazo shaken ice tea to give them a look over.

I made it about 10 pages into the first one, I won't even bother mentioning the title. But the second one:Trading from Your Gut: How to Use Right Brain Instinct & Left Brain Smarts to Become a Master Trader I couldn't put down. It is all of 202 pages including the index and an extremely easy read. I ended up finishing the entire thing last night. I started folding the top corners of pages for things to come back to, and nearly every page in chapters 4 thru 8 are folded... I started reading it again this morning as I have some time to kill.

What is the book about? Simplicity. Intuition. How to harness both of them to become a master trader. Incredible stuff.

Some of you might be aware of the Turtle Traders, but I wasn't. In summary, a man named Richard Dennis reportedly turned something like $1,600 into 200 million over the course of 10 years. He believed he could teach his method to anyone, and evidently some thought this statement contentious. To settle the debate, he took a bet with a friend and recruited 23 strangers (a.k.a the Turtles), trained the first group for 2 weeks and the second group for 1 week, and gave them each a small account. After a month he assigned larger accounts (1-2 million dollars). By the end of the experiment (5 years) the recruits had earned an aggregate of $175 million. The book is written by Curtis Faith, one of the more successful of the bunch.

(Note: there is some discrepancy with what I found on Wikipedia on the Turtles and what I remember reading in the book, so I kind of mish-mashed the two in the paragraph above. Find a good source if you have more interest.)

Here are some of the gems from the book:

Re. his Turtle days and his initial opinions on trading intuitively:

'What I didn't realize at the time, however, is that there is a big difference between trading emotionally and trading from your gut. Trading emotionally means reacting to fear and hope, which can destroy your trading decisions. Trading from your gut is different.'

Re. the basics:

'In trading, this framework's foundation is the repeating market-price behaviors that stem from the repeated interactions among market participants.'

'Repeating market-price behaviors are the source of all trading profits because they present the opportunities to gain an edge in trading. An edge is a slight statistical advantage over random behavior.'

'At any point in time, price action represents an equilibrium point: the balance between buying and selling dynamics. It also reflects a spillover of psychological pressure.' (Emphasis added.)

'For a trade to take place, someone somewhere must capitulate.'

Re. Market Momo:

'Markets display inertia similar to physical objects. It takes some force to start them moving in a particular direction, and after they are moving, they tend to keep moving.'

'Market momentum is derived from the underlying psychology of the market participants. It is the result of a chain reaction, a contagion of belief and perspective. This contagion requires an initial trigger, but when an epiemic of buying or selling reaches a certain point, it creates a reinforcing feedback loop.'

'Similar to a brush fire, market momentum stops when it has exhausted its fuel of fear, anxiety, and greed.'

'Some people think that prices go up because more buyers exist than sellers. This is not true. ... The quantity of buyers versus sellers doesn't drive the price; it's the relative desperation of those buyers and sellers.' (Emphasis added.)


I could go on and on, but you get the drift. Perhaps the best thing about the book, is that Mr. Faith goes on to provide a roadmap for how to strengthen one's intuition - how to train it, and how to train yourself to rely on it and offers several great analogies along the way. Again, I ate this thing up in about 3 hours - it is that good. Go out and buy it - now. Read it over the weekend.

I think this is the missing piece for me. Several encouraging things - trading is simple and the basics can be learned quickly. In fact, it is even possible to train yourself to rely on your intuition rather quickly as well. I have been going about it wrong without realizing it. My continued questions of why and how have been a severe detriment to my trading, even as I convinced myself that I was getting beyond them.

Go figure.