Praise for Trading from Your Gut

Determine the Required Trigger Behavior
After you have selected your stocks to watch, the next step is to
determine what it would take for you to actually buy or sell each
stock—to “trigger” a buy or sale.
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From the Library of Daniel Johnson

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With this step, you are looking to narrow the stocks to watch to
an even smaller set, those that are close enough to being a buy or
sell that you should set a market alert to tell you when the price
exceeds or drops below a certain level. You are trying to decide
whether you should buy, sell, or neither. Again, this step is ideally
suited to gut intuition because it is based on subjective soft criteria.
So to train the gut, focus on arriving at the answer as quickly as
possible.
Figure 7.2 illustrates a graph using the criteria for the rebound
swing method.
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Resistance
Support
A
B
C
FIGURE 7.2
Determining trigger criteria
To meet the trigger criteria for the rebound swing method, the
stock needs to represent a significant rebound off the support level
and also have a profit potential that is two to four times the entry
risk. Applying these criteria to the points on Figure 7.2, we see that
breaking the high for bar A does not meet either of the criteria. No
rebound occurs off the support, and the profit potential is about
equal to the amount risked if you place your exit stop below the
support.
From the Library of Daniel Johnson

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A price that exceeds the high for bar B does represent a signifi-
cant rebound off the support—too significant, it seems. By the time
the price gets that high, it is very far away from the support level,
which means the risk for the trade is too high. For this reason, bar B
fails to meet the second criterion. The potential profit is not large
enough compared to the risk; it shows only about a 1:1 ratio,
whereas we are looking for between 2:1 and 4:1.
Notice how bar C meets both criteria. A price that exceeds the
high of bar C is a significant rebound, and the potential profit is
about five or six times the risk if the price rises all the way to the
resistance level.
Your right brain doesn’t care about numbers; it cares
about the relationships between the bars, which can
be represented without any numbers.
I didn’t place any prices on this chart for a reason. They are not
necessary, and they will mess up the training for your gut intuition.
Your right brain doesn’t care about numbers; it cares about the rela-
tionships between the bars, which can be represented without any
numbers. You should have already decided that the distance
between the support and resistance is large enough during the pre-
vious step while hunting for good stocks, so you don’t need the num-
bers anymore.
With a bit of practice, you can quickly determine whether you
should set a price alert for a stock. It shouldn’t take more than a sec-
ond or two. If you can’t say yes in a few seconds, don’t set the alert.
It’s as simple as that.
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From the Library of Daniel Johnson

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