Praise for Trading from Your Gut

1. Analyze the market state—Determine whether it is a
good time to consider purchases, short sales, or neither.
2. Hunt for good stocks—Find stocks that fit the strategy you
are trading, and that reflect good potential buys or sells that
harmonize with the overall market state.
3. Determine the required trigger behavior—Determine
what each stock will have to do before you would buy or sell
it; set appropriate market alerts so you will know if this
behavior occurs.
4. Prepare and execute orders—Prepare the entry and exit
criteria and quantity for any trades so that you are ready to
place an order if an alert triggers. If an alert does trigger,
check the overall market again and then place the order.
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It might not be obvious at first glance, but when all four steps
are done properly, the right brain has an opportunity to practice.
This is true even of steps 3 and 4, which appear to be entirely left-
brain activities.
In the next few sections, I break down the different steps, show
the goal for each step, show how each step provides practice, and
show a recommended approach for each step.
Analyze the Market State
The first step in the trading process each day is to consider the
market state. With this step, you look to see if the market is good for
initiating buys, initiating short sales, or neither. The key is that you
are looking for times when it is good to be initiating a trade. You are
not trying to figure out if the market is heading up or down. You are
trying to read the market, not necessarily trying to predict it. 
The best swing trades are initiated when the market exhibits all
the following criteria:
• Early in the market cycle—The best condition for the
market is when it is just starting to move in a particular direc-
tion after having moved some number of days in the opposite
direction. You will be aligned to catch the next overall market
cycle.
• Technical alignment—These are technical factors that
increase the odds of a move in the desired direction. You
must consider price-level support and resistance; potential
support or resistance off other technical indicators that other
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market participants follow, such as trend lines or moving
averages; and support and resistance near round-number
price levels.
• Running room—These are technical factors that increase
the odds that the market will move a significant amount if it
does move in the desired direction. For a buy, you are looking
for a lack of resistance near the purchase-price level. For a
sell, you are looking for a lack of support near the purchase
level.
Doing this well requires using the right brain, especially the spa-
tial relationship manipulation and imagination that the right brain
excels at. You need to be able to perform what-if analysis in your
head. You are not concerned with what the market tells you right
now. Instead, you are concerned with what the market will be telling
you if some significant change takes place. For example, what would
it mean if the S&P rises 15 points today? Is the market starting a
new up cycle? Is it bouncing off support? Is it bouncing off a trend
line? Is it likely to run into resistance?
Figure 7.1 illustrates some analysis points. Remember to con-
sider the points as if the trading days that followed were not yet
there.
• Potential buy A—This scenario is a day following a signifi-
cant down move that was a few days down, a few days up, and
then one day down a lot and one day that appeared to stabilize
on the support around the 900 price level. At this point, a day
that broke the previous day’s high would represent a potential
start of an up cycle and the potential start of a rebound off the
support, at 900. Reasonable running room would also be
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available because the price could go to at least 925 before hit-
ting resistance, and perhaps as high as 950. So the opportunity
for a 3%–6% swing in the market is relatively high.
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Potential Buy A
Potential Buy B
Potential Sell A
Potential Buy C
NO Buy