Praise for Trading from Your Gut

If you want to be a master trader, you need to
develop your own reasons for making trades.
If you want to be a master trader, you need to develop your own
reasons for making trades, and you need to avoid doing anything just
because others are doing it. Independence of mind and spirit is one
of the hallmarks of a master trader.
In the next chapter, I explain how groups of market participants
exhibiting the instinctual behaviors outlined in this chapter create
repeating market phenomena.
C
HAPTER
3 • W
RONG
-B
RAIN
T
HINKING
51
From the Library of Daniel Johnson

---

ptg
This page intentionally left blank 
From the Library of Daniel Johnson

---

ptg
53
CHAPTER 4
The Structure of the Markets
“There is no logical way to the discovery of these
elemental laws. There is only the way of intuition,
which is helped by a feeling for the order
lying behind the appearance.”
—Albert Einstein
From the Library of Daniel Johnson

---

ptg
I often find that I learn something about one domain when I’m
least expecting it. Sometimes it happens when I’m working on
something altogether different, such as playing chess.
One of the clearest memories I have of the Turtle days, espe-
cially the first year when I spent every trading day in a room with the
other 11 Turtles, was my surprise at being around so many smart
people with such varied backgrounds. Each of us had one or two
areas in which we really excelled.
One Turtle, Mike Cavallo, was a very good chess player. He was
so good that he could easily beat me without even looking at the
board. I was by no means an expert, but I considered myself a
decent player. The fact that someone could beat me while playing
the game in his head was humbling. I wondered what enabled him
to so easily beat me and keep track of the pieces of the board in his
head without breaking a sweat. 
I have always had a series of open interests, areas I intend to
learn something about. The list changes as I become competent at
some things and discover new areas of interest over time. Learning
to fly an airplane and to skydive have been on the list; flying a heli-
copter still is. Cavallo caused me to add chess to that list.
I continued to improve my game during the last decade because
of a street player in New Orleans who sets up his board on the route
between the convention center and the French Quarter. Every few
years, I end up at a convention in New Orleans and I run into the
same guy. He sits on the sidewalk at night offering to play anyone for
a $20 bet. Every time I’ve come upon him, I’ve played a game. So
far, I have always lost.
54
T
RADING FROM
Y
OUR
G
UT
From the Library of Daniel Johnson

---

ptg
Learning enough to eventually beat him keeps chess on my list.
As I have improved, our games have been closer. The last time we
played, I had him on the defensive and almost beat him, only to
make a rookie mistake at the end and lose.
As I’ve moved about the country and the world, I have contin-
ued to study and practice chess. I have revisited the basics many
times—I found that each time I did so, I learned something new.
Ultimately, my game has improved to the point that I could on occa-
sion beat the president of the chess club I belonged to in the Virgin
Islands. After years of practice, I finally learned how to play a com-
petent game of chess, and I have developed an insight into how Cav-
allo was able to play masterfully without looking at the board. 
It was the structure of the game: the way the pieces and posi-
tions all hung together, the causal sequence of events, the signs of
strength and of weakness, the need for patience, the importance of
striking only when an advantage presents itself, and the need for
simultaneous defense and offense.
As with the moves of a chess master, the master trader
makes trades with purpose and precision.
The markets have structure, too. Similar to a good chess player,
a master trader doesn’t just make trades in isolation. The trades are
made in the context of the master strategy and the state of the mar-
kets. Some markets call for defensive trades. Some markets call for
patience. Others call for aggressive persistence. As with the moves
of a chess master, the master trader makes trades with purpose and
precision.
C
HAPTER
4 • T
HE
S
TRUCTURE OF THE
M
ARKETS
55
From the Library of Daniel Johnson

---

ptg
My chess game had always been intuitive. Even early in my
game, I could see the clever moves; I could find the combinations to
work my way out of trouble, and I could often exploit weaknesses
mercilessly. But I had no sense of how to put the odds in my favor,
how to exploit weakness when the signs of that weakness were
hardly visible, and how to put pressure on the opponent to force
mistakes. Intuition alone was not enough. I needed to understand
the structure to place my moves into a strategic context.