Praise for Trading from Your Gut

Repeating Price Behavior
Having gut intuition in trading is not enough to become a mas-
ter trader. You also need a mature understanding of the structure of
the markets, or as Einstein said, “a feeling for the order lying behind
the appearance.” This implies the use of the whole mind—a mix of
the analytical left brain and the intuitive right brain.
In a 1991 interview with The Academy of Achievement, Jonas
Salk highlighted the need for both hemispheres:
Reason alone will not serve. Intuition alone can be improved
by reason, but reason alone without intuition can easily lead
the wrong way. The[y] both are necessary. The way I like to
put it is that I might have an intuition about something, [so] I
send it over to the reason department. Then after I’ve
checked it out in the reason department, I send it back to the
intuition department to make sure that it’s still all right.
To be able to check out intuition, we need our left-brain reason
to supply the proper structure and framework. In trading, this frame-
work’s foundation is the repeating market-price behaviors that stem
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from the repeated interactions among market participants. People,
namely traders and investors, react similarly under similar circum-
stances; their behavior repeats in predictable ways. When you aggre-
gate a large group of people into a market, this repeated behavior
shows up in the form of repeating market-price movements.
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 behav-
ior. For example, if you can identify market price behavior that
makes it statistically just as likely that the price will go up $1 in the
next few days as that it will go down 50¢, then you can make a trade
to buy that stock and, over time, you will make money. Each time
you trade, you will have a 50/50 chance of losing 50¢ or winning $1
per share. The profits from a small edge averaged over many trades
add up quickly.
Identifying these repetitions is not easy—otherwise, making
money trading would be child’s play. Master traders understand the
importance of this skill and use a combination of right-brain instinct
and left-brain smarts to identify and benefit from repetitions in mar-
ket behavior. 
I discussed the scientific names of several cognitive biases in the
last chapter, and I gave you a quick look at how these biases impact
trading. In this chapter, I go much deeper into the subject of trading
psychology. I cover the psychological underpinnings of five concepts
that are core to the structure of trading: price, momentum, cycles,
support and resistance, and euphoria and despair. 
Before you can correctly identify the repeating opportunities
that signal an edge, you need to understand the building blocks of
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the structure itself. This might seem too basic for some readers, but
have patience. Remember, I learned to play a decent game of chess
only after I bit the bullet and spent years revisiting the basics that I
felt I, too, already knew.