Praise for Trading from Your Gut

The Primitive Gut: The Importance of
Honing Your Instincts
One of the reasons that the novice’s gut reaction is often wrong
stems from the shortcuts that come preprogrammed into human
minds. Our minds reflect the evolution of our ancestors, who
selected for beneficial traits. Often the very traits that served human
beings well in the primitive past do not serve us well as traders. The
shortcuts that are preprogrammed into our brains are called heuris-
tics. Several common heuristics, called cognitive biases, cause
traders to make systematic errors in judgment. Through proper
training, traders can learn to overcome these biases. 
I learned the importance of overcoming systematic errors in
judgment during the first month of trading as a Turtle when we
were all given a small trading account. My intuition correctly told
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me that the most important factors would be how well we displayed
the spirit of our training, took advantage of the opportunities that
arose, managed our risks, and handled the trading on an emotional
level. Most of the other Turtles thought our goal was to make as
much money as possible during that month—to have the highest
account balance possible. 
My gut told me otherwise. If a trade came that met our criteria,
I took it no matter how risky it seemed. I was concerned with per-
forming well on my own terms, not making money, per se. My intu-
ition paid off. A trade in heating oil seemed like a very risky trade
when it started, so risky that many of the other Turtles missed it. In
doing this, they displayed a bias known as loss aversion. I took the
trade because my intuition told me it was the right thing to do,
despite the risks. That trade turned out to be a big winner. It was
probably the most important trade of the entire Turtle program
because, on the basis of that first month of trading, I was given the
largest trading account among the Turtles, a distinction I held for
the duration of the four-year program.
It wasn’t my smarts that made me take that trade, and it wasn’t
my left brain. All the Turtles were smart; they all knew enough to
see that the heating oil trade met our criteria for entry. The differ-
ence was intuition: I followed my gut instinct.
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CHAPTER 3
Wrong-Brain Thinking
“Nothing is more intolerable than to have
to admit to yourself your own errors.”
—Ludwig van Beethoven
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I first learned about trading from my employer when I was a
high school senior. It was not only my first job as a computer pro-
grammer, but it was the first job I had in which I used my brain
instead of my body.
My first task was to translate computer code that my boss,
George, had written for the Apple II computer. I translated the
Apple version of the BASIC computer language into the version that
ran on the relatively new Radio Shack TRS-80 computers. I spent
my time coding each statement one by one; at first I didn’t pay much
attention to what the code actually did. However, I soon learned
that the code I translated read information from of a set of files that
was in a specific format for the floppy disk. These files contained
pricing data for commodities such as corn, wheat, gold, and silver.
Then the code performed some math and simulated buying and
selling commodities contracts.
After I finished the translations, I was assigned the more inter-
esting job of programming new trading algorithms from the then-
new 1980 book by Charles Patel, Technical Trading Systems for
Commodities and Stocks. This was my first introduction to the world
of systems trading. I liked the idea of a trading system. It seemed
like a scientific approach to extracting profits from the markets. Yet
I couldn’t shake the feeling that trading systems seemed too good to
be true. “It can’t be that easy,” I thought. My intuition was partially
right. Many of the systems we tested were crap; they didn’t make
any money. But some of the systems made quite a bit of money
according to the testing programs I was running at work.
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Livermore demonstrated that money could be
made in the markets because the nature
of the people trading never changed.
About the same time that I started programming the code for
trading systems, George lent me a copy of Edwin Lefevre’s book
Reminiscences of a Stock Operator, introducing me to the great
speculator Jesse Livermore. I was hooked. I decided that I wanted
to be a trader. What really interested me was the way Livermore
demonstrated that money could be made in the markets because the
nature of the people trading never changed. For example, he said,
“The game does not change and neither does human nature.” This
was my first introduction to the idea that money could be made in
trading because of the way that human nature interacted in groups.
George lent me other books that greatly influenced me: Charles
Mackay’s 1841 classic Extraordinary Popular Delusions and the
Madness of Crowds and Gustav Le Bon’s 1895 classic The Crowd: A
Study of the Popular Mind. These books started me thinking that
some trading systems or algorithmic strategies seemed to work
because they relied on repeatable market-price patterns based on
the consistency of human nature over time.
I refined this perspective after studying psychology. I learned
how the actions of groups of traders influence price in repeatable
ways. If you want to understand these repeated price patterns, you
first need to consider why most traders lose money—to recognize
the behavior of the majority of traders. 
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One of the commandments of the master trader is that if you
want to make money trading, you can’t act similar to most other
traders, but you need to know what they are doing. Instead of using
their right brain, they use their “wrong” brain. In this chapter, I
explain why they lose money and delve into what “wrong-brain
thinking” means.