Praise for Trading from Your Gut

Aug
Apr
May
Jun
Jul
1025
1000
975
950
925
900
875
850
825
800
775
750
725
$SPX (S&P 500 Large Cap Index) INDX
21-Aug-2009
O 1009.06
H 1027.59 L 1009.06
C 1026.13
V 4.98
Chg +18.76 (+1.86%) 
$SPX (Daily) 1026.13
FIGURE 7.1
Market state analysis
• Potential buy B—This scenario is a day following a signifi-
cant drop in which three of the last four days were down days
and the price appeared to find some support at the 875–880
level. A move above the high of the day that made the low
would represent a potential cycle reversal and rebound off
the support, at 875. A lot of running room would also be avail-
able at this price because potential resistance at 925 is about
5% away and potential resistance at 950 is about 8% away.
• Potential sell A—In this scenario, the price has reached the
resistance level at 950 after several very significant up days. A
drop below the low of the previous day’s low would represent
a potential rebound off the 950 resistance and the potential
beginning of a new down cycle. 
From the Library of Daniel Johnson

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ptg
It is important to note that the potential sell would have
remained valid for each of the successive days if the market
had dropped lower. However, this did not happen. This illus-
trates an important aspect of the what-if analysis of swing
trading. Four days would have represented good days for a
sell if the market had done something. However, it did not
trigger the action that would have made a good sale, so you
would not have actually made any short-swing sales during
this time because the market triggers were not met. The mar-
ket conditions were ready, but the market did not indicate the
beginning of a down cycle.
So in this particular what-if scenario, the “if” condition did not
occur, which is why this is considered a potential sell point. It
had the potential to indicate a market sell condition if certain
things had occurred, primarily if the price of the S&P 500
Index had dropped below the previous day’s low.
• Potential buy C—In the case of the “Potential Buy C” point,
significant downward retracement off the highs at approxi-
mately 1,020 has occurred, and there is running room of about
3% from the previous day’s high, at approximately 990. So a
market move above this 990 high represents a potential start
of an up cycle that could run to approximately 1,020.
• No buy point—This point corresponds with the point
labeled “NO Buy” on the chart. In contrast with “Potential
Buy C,” this point does not follow a significant retracement.
It also shows only about 1% running room, so the market
could easily run into resistance very quickly. Therefore, a sig-
nificant up move in the market is less likely.
Remember that the goal when analyzing the market state is to
be able to answer these two questions: What, if anything, would the
C
HAPTER
7 • S
IMPLICITY AND
S
PEED
: T
RAINING TO
B
E A
M
ASTER
129
From the Library of Daniel Johnson

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ptg
market have to do for it to be a good time to initiate a buy? And
what, if anything, would the market have to do for it to be a good
time to initiate a sell? If the market can’t do anything on a given day
to indicate that it is a good time to buy or sell, you should just wait
for another day to do your trading. Most of the time, I find this to be
the case. Most days are not good days to initiate a swing buy or sell.
Most days are not good days to initiate
a swing buy or sell.
To train your right brain properly, you need to make this analy-
sis very quickly. Don’t allow time for your left brain to take over. At
first, give yourself less than 15 seconds to answer with one of these:
“Buy if it exceeds yesterday’s high,” “Sell if it drops below yesterday’s
low,” or “Neither.” As you gain practice, reduce the time you have to
make this decision. 
Keep your analysis visual instead of numerical. Doing this
quickly and visually forces you to use your gut intuition instead of
your intellect. Use a stopwatch if you find yourself unable to make a
decision quickly. If you reach the time limit without making a deci-
sion, the answer is “neither” by default.
Over time, you should be able to glance at a chart of the major
indices and decide in less than one second if the criteria for a buy or
sell have been met. You will need to do this as a last-minute check
just before placing your orders to buy or sell the stock. If you can
make this decision quickly, you are using your gut. 
130
T
RADING FROM
Y
OUR
G
UT
From the Library of Daniel Johnson

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ptg
Remember Juan Fangio. If you don’t have time to think, your
intuition will take over. So don’t give yourself time to think while you
are practicing. Force your intuition to take over.