Praise for Trading from Your Gut

FIGURE C.1
The 1987 silver trade
Because I bought very low and exited the trade just above
$12.75, or about $1.50 per ounce higher than the entry price, I
made a lot of money on the trade.
1
I had 1,200 of the 5,000 ounce
contracts, so I made about $9 million on the trade. That was a 45%
gain on the account size of $20 million I was trading that year. But I
left too much money on the table.
My mistake was that I then viewed trading as a battle of will
instead of as a game of finesse. I felt that if I could take the pain of
letting my positions go against me, it would make me a better trader.
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$15
$14
$13
$12
$11
Jan
Feb
Mar
Apr
May
Jun
1987
Optimal
Exit
Actual
Exit
Trade
Entry
1. In his book on the Turtles, The Complete Turtle Trader (Harper Collins, 2008),
and in an article that appeared in the now defunct Trader Monthly Magazine,
Michael Covel erroneously reported that I lost a large sum of money on this
trade. In fact, it was a big winning trade for me.
From the Library of Daniel Johnson

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I should have listened to the advice of Jesse Livermore in his
book How to Trade in Stocks:
This incident proves the folly of trying to find out “a good rea-
son” why you should buy or sell a given stock. If you wait until
you have the reasons given you, you will have missed the
opportunity of having acted at the proper time! The only rea-
son an investor or speculator should ever want to have
pointed out to him is the action of the market itself. When-
ever the market does not act right or in the way it should—
that is reason enough for you to change your opinion and
change it immediately. Remember: There is always a reason
for a stock acting the way it does. But also remember that
chances are you will not become acquainted with that reason
until some time in the future, when it is too late to act on it
profitably.
Whenever the market does not act right—that is
reason enough for you to change your opinion
and change it immediately.
Silver wasn’t acting right. In subsequent years, I learned that
whenever a market makes a vertical move, as silver did that year, it
ends suddenly. Whenever the market breaks down after going verti-
cal, the move is over. Sure, it might rally again to reach or exceed the
highs, but the market is psychologically broken.
I should have exited the trade after the failed rally broke down
at the point labeled Optimal Exit in Figure C.1. This was the best
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From the Library of Daniel Johnson

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position and where a seasoned trader would have exited. I let more
than $10 million in additional profits slip by because I did not pay
enough attention to my intuition and the soft aspects of trading.
As a Turtle, I overemphasized the logical, systematic methods
we were taught. I should have remembered that Richard Dennis
himself didn’t always trade this way; he sometimes used his intuition
to exit profitable trades. Using my whole mind while trading would
have made me a better trader. 
It is a bit ironic that my trading idol, Livermore, the man whose
story initially interested me in the idea of becoming a trader, was
one of the first systematic traders who saw the need to follow, not
neglect, his intuition. Had I read his story more carefully and not
been so overconfident in my own abilities as a trader, I might have
noticed the advice he gives (again from How to Trade in Stocks):
During the big Bull Market in the late twenties, there were
times when I owned fairly large amounts of different stocks,
which I held for a considerable period of time. During this
period I never felt uneasy over my position whenever Natural
Reactions occurred from time to time.
But sooner or later there would be a time when, after the
market closed, I would become restive. That night I would
find sound sleep difficult. Something would jog me into con-
sciousness and I would awaken and begin thinking about the
market. Next morning I would be afraid, almost, to look at the
newspapers. But perhaps I would find everything rosy and my
strange feeling unjustified. The market might open higher. Its
action would be perfect. It would be right at the peak of its
movement. One could almost laugh at his restless night. But I
have learned to suppress such laughter.
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From the Library of Daniel Johnson

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For next day the story would be strikingly different. No disas-
trous news, but simply one of those sudden market turning
points after a prolonged movement in one direction. On that
day I would be genuinely disturbed. I would be faced with the
rapid liquidation of a large line. The day before, I could have
liquidated my entire position within two points of the extreme
movement. But today, what a vast difference.
I believe many operators have had similar experiences with
that curious inner mind which frequently flashes the danger
signal when everything marketwise is aglow with hope. It is
just one of those peculiar quirks that develops from long study
and association with the market.
Frankly, I am always suspicious of the inner tip-off and usually
prefer to apply the cold scientific formula. But the fact
remains that on many occasions I have benefited to a high
degree by giving attention to a feeling of great uneasiness at a
time when I seemed to be sailing smooth seas.
I was too interested in the “cold scientific formula” and not
interested enough in intuition and the right brain’s role in my trad-
ing for my own good. Had I stopped to notice, I would have exited
the silver trade much closer to the optimal point.
This trade has always stayed in my mind as a warning not to get
too sure of myself and not to place too much emphasis on the abili-
ties of my logical mind. I was trying to brute-force my trading, to
tough it out better than anyone else. I needed to display the finesse
of Juan Fangio; I needed to trade with my whole mind.
I kept this trade in mind years later when, after almost an entire
year of bullish movement from a base at 1,250, the S&P reached
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1,550 and then had a pullback to below 1,400 in late July and early
August 2007. This was the first time in almost a year that we had a
significant retracement as the market climbed higher. A few months
later, in late September and early October, the market surpassed the
July high. Unlike the previous new highs of the run-up from 1,250,
the market could not hold the new highs. As Livermore would say,
“The market did not act right or in the way it should.”
If you look at the weekly chart in Figure C.2, you can see that,
on a weekly basis, the market presented a classic rebound swing
method short trade.
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