Praise for Trading from Your Gut

Mental Inertia: La De Da, La De Da 
At the height of the Internet bubble, I was working in Silicon
Valley. In those exuberant times, I was amazed at the almost univer-
sal perspective that the good times would never end. Most of my
friends were heavily invested in stocks, many of them trading on
margin. They believed that the Internet had changed the world of
finance and that the stock market would only go up. I saw the same
perspective in the real estate and stock markets of 2006 and 2007.
Many people believed that the bull markets were here to stay. They
could come up with all sorts of reasons why this time was different
and why prices would continue to go up. I didn’t share their opinion.
I had seen my share of bubbles and crashes; I knew that the market
tended to change when people, especially the public, least expected
it. The events that have taken place since summer 2008 prove this
point.
Master traders are always ready to change their opinions and
perspectives. They consistently look for the reasons why they are
wrong instead of trying to prove themselves right. Master traders
don’t suffer from mental inertia.
Mental inertia comes from the prime lesson that new learning is
retained for later use. When you form an opinion, it takes some spe-
cific impetus to change that opinion. The stronger your opinion, the
stronger the impetus required to change that opinion. So when you
have an idea that the market is not good for buying, it takes consid-
erable motivation to change that idea. When a trader decides to
place a trade, it often takes considerable drive to change course and
exit the trade.
40
T
RADING FROM
Y
OUR
G
UT
From the Library of Daniel Johnson

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ptg
Mental inertia results from a mismatch between the decisive-
ness required to act and the strength of the opinion required to
make those decisions. Your brain wants sufficient data before mak-
ing a decision; when it has that data, it requires significantly more
information to change its mind.
The mental inertia of individual traders and investors causes the
markets themselves to act similar to a heavy object. Have you ever
tried to push a stopped car on a level road? It can be very hard to get
it rolling; when it gets rolling reasonably fast, it can be very hard to
stop—especially because the power brakes don’t usually work when
the motor isn’t running, which is usually the case when you have to
push a car. Most market participants are too slow to react to signifi-
cant changes in the markets. They are too slow to get in when an
opportunity presents itself, and they are too slow to get out when
the opportunity ends. They don’t want to give up losing positions or
ideas. If they are convinced that a particular stock is going up for
some reason, they will hold on to that idea even when the price
drops. If they buy a stock and it starts to go down, they will convince
themselves that they are correct, despite the market’s overwhelming
evidence to the contrary.
Master traders know that mental inertia is one of the major rea-
sons behind market momentum. They also know that, because of
this inertia, the best time to get in is right before most other traders
enter the markets, and the best time to exit is just before most other
traders exit the markets. Because they understand the inertia of
markets and the mental inertia of the market participants, they look
for signs that the markets have begun to react to some external force
just before anyone else takes notice. 
C
HAPTER
3 • W
RONG
-B
RAIN
T
HINKING
41
From the Library of Daniel Johnson

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ptg
Master traders also look for places to enter the markets with
trades that offer a good risk/reward opportunity. They determine
these places by using an assessment that incorporates mental inertia
of market participants as part of the model.