Praise for Trading from Your Gut

Mar
9
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23
Apr 6
13
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27 May
11
18
6
26 Jun
Jul
8
15
22
20.0
19.5
19.0
18.5
18.0
17.5
17.0
16.5
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14.5
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CSCO (Cisco Systems, Inc.) Nasdaq GS
9-Jul-2009
Op 18.27 Hi 18.51 Lo 18.06
Cl 18.17 Vol 52.9M
Chg +0.04 (+0.22%) 
CSCO (Daily) 
FIGURE 6.3
Overall market synchronization
As with many swing trades, the rebound swing method has a
very short leash for the exit. You put on a stop just past the low of the
current breakout. For this example, that would be a price below the
low of $17.61 set on the 26th—approximately $17.50. This stop gets
you out if the trade doesn’t work out. 
After the trade moves more than halfway to the resistance line,
you should have a significant profit. If that happens, you should exit
when the price breaks down a little bit. One easy method is to put a
stop at the previous day’s low so you will exit if the price drops below
From the Library of Daniel Johnson

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that price. This approach lets you continue to ride a long move if it
continues in the same direction, but will get you out quickly in the
event of a reversal. If you used this rule in the Cisco example, you
would have exited on June 3 at a price just below $19.41. So you
would have earned about $1.25 for a risk of about 55¢–60¢.
Now I break the method into its four components so that I can
specifically address the role played by left-brain smarts and right-
brain intuition in the trading of this method.
Market Environment
This method works well in many types of markets. However, you
trade only long and short in a range-bound market. In a rising mar-
ket, you trade only long trades. In a falling market, you trade only
short trades.
The easiest way—and the most effective, from my experience—
to determine the type of market is to open a daily chart that holds six
months of prices. If the prices appear to be going down, then you
are in a declining market. If they appear to be going up, then you are
in a rising market. Suppress the left-brain need to have a very spe-
cific definition when making this judgment. Look at the chart and
decide within a second or so: up, down, or sideways. If the answer is
up, take only long trades; if the answer is down, take only short
trades; and if the answer is sideways, you can take both kinds of
trades.
This factor applies to both the market overall and individual
stocks. If the overall market is down, don’t trade buys off of support,
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no matter how an individual stock appears. These trades are more
likely to fail if the market drags the individual stock down. If the
overall market is up, don’t short stocks off of resistance, for the same
reason.
Setup
The setup for the trade is clearly established support and resist-
ance that represents a significant price differential between these
two levels. The easiest way to determine this is, again, with your eye-
balls, using your right brain’s pattern matching. Look at the chart
and determine whether a particular stock has clear support and
resistance. If it doesn’t, move on to another stock. If it does, check
the price differential between the support and the resistance. A
stock needs room to run if it does bounce. This is a judgment call
that you need to learn to make. 
I like to see a potential profit of two to four times the entry risk.
You should know the entry risk when you place the order because
you will already know the price of entry and the lowest price of the
breakout or test of the support. If the distance from the entry point
to the resistance is not at least twice that amount, don’t even place
the order. 
You will be able to train your right brain to quickly process the
information required to analyze both these criteria for entry,
enabling you to quickly determine whether a stock is getting ready
for the rebound swing method. If you rely on your left brain for this
task, you will need hours to prepare for trading each day. Your right
brain is well suited for this task. Your left brain? Not so much.
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