Praise for Trading from Your Gut

If at First You Don’t Succeed: The
Importance of Persistence
One of the more powerful instincts our brain exhibits is persist-
ence: You should persevere even in the face of difficulty and obsta-
cles. Dogged persistence usually pays off. It enables you to reach
difficult goals and accomplish great tasks. Most of science’s discov-
eries would likely not have occurred if human brains had not been
programmed to persist in the face of adversity. 
For traders, persistence is both required and problematic.
Persistence will carry you through the difficult times when the
inevitable losses come, when your account draws down from its
highs, and when the markets are not friendly. Unfortunately, persist-
ence can also cause many traders to stick to methods that don’t work
or to stay in a trade they should have exited long before. This behav-
ior is especially problematic because it is often combined with men-
tal inertia. Traders might place a trade for a specific reason. Mental
inertia will prevent them from seeing the mounting evidence that
the reasons for the trade are no longer present and that they should
get out. Persistence will move them to persevere, shouldering the
pain of the mounting losses in an effort to achieve the goal. 
Master traders have learned to reverse course quickly, under-
standing that they should not keep enduring losses. Persistence in
pursuit of the long-term goal of profits is important. Persistence in a
particular trade can sometimes result in more harm than good. 
See, I’m Right: Hubris, Damned Hubris
A behavior that has caused problems for many traders is the
desire to find supporting evidence for previously held decisions or
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RADING FROM
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UT
From the Library of Daniel Johnson

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ideas, and the tendency to overlook contradictory evidence. This
tendency is called confirmation bias in behavioral finance. Traders
need to pay attention to reality instead of wishful thinking. The best
approach is to play devil’s advocate and troubleshoot those ideas or
decisions, to identify where they might be wrong. 
One of the more interesting concepts I have heard in the last
few years is the notion that wisdom is the capability to have “strong
opinions, weakly held.” My favorite financial blogger, Barry Ritholz,
first brought this concept to my attention in a post in which he
described how he thought it applied to trading and investing. The
concept originated with Paul Saffo from the Palo Alto Institute for
the Future, a nonprofit organization that helps companies make
decisions about the future. Saffo applied the concept to the uncer-
tainty associated with making forecasts about the future. The idea
has considerable merit in any area with a high level of uncertainty,
such as trading. 
Weak opinions have a negative impact on trading. Master
traders are decisive. To make money, you need to take trades. As a
practical matter, this means developing models for how the market
works, testing them, and then making live trading decisions using
those models. Traders need strong opinions about how the market
works to make critical trading decisions. Many people have trouble
pulling the trigger. If you have weak opinions, you will find this even
more difficult.
However, strong opinions should be weakly held. Expert traders
are constantly on the lookout for why their thinking might be
flawed. When you place a trade, you should pay far more attention
to signals that the market is acting in a manner that indicates the
trade is wrong and should be discarded than to the reasons why the
C
HAPTER
3 • W
RONG
-B
RAIN
T
HINKING
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From the Library of Daniel Johnson

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ptg
trade should be kept. As the saying goes, you should speak and act as
if you are right, but also look and listen as if you might be wrong. In
circumstances of high uncertainty, you should always be looking for
indications that your previous ideas are wrong. This requires a cer-
tain level of humility and openness.