Praise for Trading from Your Gut

Euphoria and Despair: The Thrill of
Victory and the Agony of Defeat
Another reliable concept in trading is the overextension that
occurs at the end of rapid price moves. Sometimes these moves take
place during months or weeks, but sometimes they take place dur-
ing a few days. 
In many ways, we can liken these moves to what might happen
to a small weight attached to the end of a fishing pole. If you move
the pole slowly, the weight will move with the pole. If you move the
pole swiftly, the weight will move but a lag will occur because of
the weight’s inertia. The weighted end will move in the direction
of the pole’s movement, but the end of the pole will overshoot and
spring back toward the original position. Having overshot again, it
will move back toward the pole’s new position. With each successive
cycle, the amount the weight overshoots will decrease until finally
the weighted end of the pole comes to rest at equilibrium in the
pole’s new position. If you plotted the end of the pole’s position after
you moved it suddenly lower, you might get a graph that looks simi-
lar to Figure 4.6.
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UT
FIGURE 4.6
Damped harmonic oscillator 
From the Library of Daniel Johnson

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ptg
In physics, this type of movement is associated with a damped
harmonic oscillator, a series of progressively smaller waves that
oscillate about a center line. A plucked guitar or piano string
behaves similar to a damped harmonic oscillator; the vibrations are
larger at first, and then the oscillations die down over time.
Markets often act similar to damped harmonic oscillators. As
with the weighted end of a fishing pole, they often overshoot when
they move and then bounce around slowly to find a new equilibrium
after a large price displacement. Consider the graph in Figure 4.7 of
the price for auto parts supplier Dana Holdings.
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TRUCTURE OF THE
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ARKETS