Praise for Trading from Your Gut

FIGURE 4.8
Price displacement and return to equilibrium 
However, the market thought otherwise. Similar to the end of
the fishing pole, as quick as the price ran up, it quickly snapped back
and oscillated around the new equilibrium point of $7 per share for
the next few weeks.
The DRYS chart in Figure 4.8 illustrates two important con-
cepts: a euphoric rally followed by a despair crash. An exhaustion
rally takes place at the end of a period of steady price increase. In
this case, the price had risen for more than two months from about
$3.50 to $6 to $7 in late April. After that point, it rose dramatically,
gaining 50% in just five days. This was the exhaustion rally. At this
stage, emotion takes over and buyers are paying whatever price they
need to get the stock. The master traders might have bought during
the first day or two of the run-up, but they were not buying toward
the end, as the price continued an unsustainable vertical climb.
Vertical climbs will always end.
C
HAPTER
4 • T
HE
S
TRUCTURE OF THE
M
ARKETS
77
Euphoric Rally
Despair Crash
DRYS (Dry Ships, Inc.) Nasdaq GS
10-Jul-2009 2:21pm
Op 5.15 Hi 5.20 Lo 5.00 Last 5.16 Vol 12.5M Chg -0.10 (-1.90%) 
DRYS (Daily) 5.16 
Mar
9
16
23
Apr 6
13
20
27 May
11
18
26 Jun
Jul
8
15
22
6
11
10
9
8
7
6
5
4
3
From the Library of Daniel Johnson

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Vertical climbs will always end. You can make a lot of money
during the climb if you got in early. Buying late during a vertical
climb is a recipe for disaster.
The psychological power of the buyers quickly dried up as the
price opened up over $11 and then dropped below $10 on the same
day, beginning a six-day descent to $6 by mid-May. Market senti-
ment can change this quickly. One day it might be irrationally bull-
ish. The very next day, it might be irrationally bearish. During these
times, traders can potentially make (and lose) a lot of money. The
difference between the master traders and the others is that master
traders know how to recognize the signs of exhaustion, overexten-
sion, and panic—novices don’t. 
But how do the basics of market structure interconnect to pres-
ent opportunities for making money—the elusive edge in trading?
How does intuition fit in with this market structure? How do we use
our gut instinct to identify the opportunities that present them-
selves?
These are good questions that we’ll answer soon enough. First,
we need to examine the proper role of intuition and instinct, and
how this differs from rational analysis. We need to provide a firm
basis for trusting your gut. 
78
T
RADING FROM
Y
OUR
G
UT
From the Library of Daniel Johnson
Downloat at Wow eBook

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79
CHAPTER 5
Training and Trusting Your Gut
“Intuition is reason in a hurry.”
—Holbrook Jackson
From the Library of Daniel Johnson

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The Monaco Grand Prix is one of the most famous races in the
world and one of the most well-known sporting events in general.
The Grand Prix’s track is set in the narrow, winding streets of Monte
Carlo, where trackside spectators can watch cars speeding by much
closer than in a typical race. The track is also one of the toughest in
racing; the 77-lap circuit allows no margin for error. For this reason,
the best drivers usually win the Monaco Grand Prix. It is a racer’s
race.
The track in Monaco has one very interesting feature: A signifi-
cant portion of it is an underground tunnel. It can be tricky for
drivers to adjust their eyes from the light of day to darkness and
then back to bright daylight again. When drivers emerge from the
tunnel, they have compromised vision through the fastest portion of
the track.
The Argentine racer Juan Manuel Fangio, known as “El
Maestro” (Spanish for “The Master”), is regarded by many as the
best race car driver of all time. His five Formula One champi-
onships held the record for 46 years. His first Formula One victory
occurred at the 1950 Monaco Grand Prix.
Fangio started the 1950 Monaco Grand Prix in the pole posi-
tion, and he held the lead after the first lap. As he emerged from the
tunnel into daylight, Fangio braked suddenly instead of maintaining
his speed into the straightaway and raised his hand to warn other
drivers. In doing so, he avoided a pileup around the blind corner
obscured by the balustrade on the side of the track.
On the first lap behind him, Nino Farina had skidded out
because a section of the track—after the chicane (small S-curve)
80
T
RADING FROM
Y
OUR
G
UT
From the Library of Daniel Johnson

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and before the corner known as the Tobacconist’s corner—was wet
from blowing sea spray. Eight separate cars crashed into the pileup.
That meant that half the lineup—9 of the 18 cars—was involved in
this one crash. Fortunately, no one was seriously injured. 
Why had Fangio braked? “I could detect agitation among the
spectators,” he recalled. “They were not looking at me leading the
race, but were looking the other way.” As Fangio noted, they nor-
mally would be facing the lead car in the race, alerted to his pres-
ence by the deep resonating rumble as he came out of the tunnel.
However, instead of seeing the crowd’s faces this time—which
would make the spectators a relatively light-colored blur as he
passed by at high speed—he was seeing a darker blur from the backs
of their heads as they turned away to look at the crash. Out of the
corner of his eye, this triggered something in his subconscious,
right-brain thinking.
At the speeds of a Formula One race, even in 1950, drivers had
no time for deliberative, conscious decision making. El Maestro’s
intuition and quick reaction saved the race—and possibly his life.