ptg [email protected],e -Sckoylpleec: tiiioin.g.ocnomch From the Library of Daniel Johnson Praise for Trading from Your Gut “For all those who wonder if the powers of right brain thinking could apply to the trends-and-charts universe of stock and options trading, Curtis Faith has their answer. In Trading from Your Gut, Faith taps brain research, neurological models, and the wisdom of experience to provide a roadmap for decision making in a new era of volatility.” —Daniel H. Pink, author of A Whole New MindandDrive “I consider a book to be worth reading if it helps me develop a major paradigm shift. The section in this book about how to train your brain to help you become an intuitive trader blew me away and gave me some fantastic ideas that will significantly help traders learn to trade better. For me, that kind of idea-generating inspiration is what makes Trading from Your Gut a great trading book.” —Van K. Tharp, bestselling author of Trade Your Way to Financial Freedom andSuper Trader “Emotions are not tools of cognition. How we feel about a stock has no ptg bearing as to how it performs. But with the skill of both a trained psychoanalyst and market pro, Curtis Faith’sTrading from Your Gutexamines the human instinct behind our investment decisions. Because we are too often our own worst enemy in the markets, this is a unique and thoughtful guide to overcoming the biggest hurdle of financial success…ourselves.” —Jonathan Hoenig, Portfolio Manager, Capitalistpig Hedge Fund LLC and Fox News contributor “Curtis Faith’s Trading from Your Gut pulls off a difficult task—extracting pithy, simple trading strategies from the complex world of behavioral finance and psychology. The author of the hugely successful Way of the Turtle—an essential read for any committed trader—Faith takes the insights derived from psychology, marries them to cogent observations by master traders like George Soros, and then superimposes them onto a series of analysis-based theories to deliver a cogent trading plan. As Faith observes, reading this book should enable you to combine ‘your smarts and your intuition,’ all achieved with a left field combination of wisdom derived from Formula One racing drivers, skydivers, Napoleon Bonaparte, Roman military theory, and Jessie Livermore. Next stop? Combining quantum theory, the wisdom of Ben Graham, the genius of proper investing, and tips on how to survive volatile markets?” wiiwi.—gwoD.ntracavhidd@i Sngtmegv-aesnioslfo.tcnwo, maFrT,e ’s-S “ckAoydlpvleeenc: ttiuiiroion.ug.soc nIonmcvhestor” columnist From the Library of Daniel Johnson “From the start, Curtis Faith makes clear the difference between allowing emotions into trading and trading from the gut—emotion has no place in trading, whereas he asserts that your gut feelings can make the whole difference between mundane trading and master trading. Through a process of discovery, with many entertaining stories and examples, Faith explains his findings and leads the reader into developing a whole-brain approach to trading, utilizing both analytical and instinctual powers. With the encouragement of this book, you will learn to listen to both your intuition and your intellect to become a more complete trader, giving yourself the edge for success.” —Alan Northcott, author of The Complete Guide to Investing In Short Term Trading ptg [email protected],e -Sckoylpleec: tiiioin.g.ocnomch From the Library of Daniel Johnson Trading from Your Gut ptg [email protected],e -Sckoylpleec: tiiioin.g.ocnomch From the Library of Daniel Johnson This page intentionally left blank ptg [email protected],e -Sckoylpleec: tiiioin.g.ocnomch From the Library of Daniel Johnson Trading from Your Gut How to Use Right Brain Instinct & Left Brain Smarts to Become a Master Trader Curtis Faith ptg [email protected],e -Sckoylpleec: tiiioin.g.ocnomch From the Library of Daniel Johnson Vice President, Publisher: Tim Moore Associate Publisher and Director of Marketing: Amy Neidlinger Executive Editor: Jeanne Glasser Editorial Assistant: Myesha Graham Operations Manager: Gina Kanouse Senior Marketing Manager: Julie Phifer Publicity Manager: Laura Czaja Assistant Marketing Manager: Megan Colvin Cover Designer: Brand Navigation Design Manager: Sandra Schroeder Managing Editor: Kristy Hart Senior Project Editor: Lori Lyons Copy Editor: Krista Hansing Editorial Services Proofreader: Apostrophe Editing Services Indexer: Lisa Stumpf Compositor: Nonie Ratcliff Manufacturing Buyer: Dan Uhrig © 2010 by Curtis Faith Publishing as FT Press Upper Saddle River, New Jersey 07458 This book is sold with the understanding that neither the author nor the publisher is engaged in rendering legal, accounting, or other professional services or advice by pub- lishing this book. Each individual situation is unique. Thus, if legal or financial advice or other expert assistance is required in a specific situation, the services of a competent professional should be sought to ensure that the situation has been evaluated carefully and appropriately. The author and the publisher disclaim any liability, loss, or risk result- ing directly or indirectly, from the use or application of any of the contents of this book. FT Press offers excellent discounts on this book when ordered in quantity for bulk purchases or special sales. For more information, please contact U.S. Corporate and Government Sales, 1-800- 382-3419, [email protected]. For sales outside the U.S., please contact Interna- ptg tional Sales at [email protected]. Company and product names mentioned herein are the trademarks or registered trademarks of their respective owners. All rights reserved. No part of this book may be reproduced, in any form or by any means, without permission in writing from the publisher. Printed in the United States of America First Printing December 2009 ISBN-10: 0-13-704768-1 ISBN-13: 978-0-13-704768-0 Pearson Education LTD. Pearson Education Australia PTY, Limited. Pearson Education Singapore, Pte. Ltd. Pearson Education North Asia, Ltd. Pearson Education Canada, Ltd. Pearson Educatión de Mexico, S.A. de C.V. Pearson Education—Japan Pearson Education Malaysia, Pte. Ltd. Library of Congress Cataloging-in-Publication Data Faith, Curtis M. Trading from your gut : how to use right brain instinct and left brain smarts to become a master trader / Curtis M. Faith. p. cm. Includes bibliographical references and index. ISBN 978-0-13-704768-0 (hbk. : alk. paper) 1. Investment analysis—Psychological aspects. 2. Investments—Psychological aspects. 3. Speculation—Psychological aspects. I. Title. H33G2.4650219’9.F—34d c220210 [email protected],e -Sckoylpleec: tiiioin.g.ocnomch 2009037199 From the Library of Daniel Johnson For my two grandmothers, Edna and Esther ptg [email protected],e -Sckoylpleec: tiiioin.g.ocnomch From the Library of Daniel Johnson This page intentionally left blank ptg [email protected],e -Sckoylpleec: tiiioin.g.ocnomch From the Library of Daniel Johnson Contents Acknowledgments . . . . . . . . . . . . . . . . . . . . . xi Foreword . . . . . . . . . . . . . . . . . . . . . . . . . . . xiii Preface . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 Chapter 1 The Power of the Gut . . . . . . . . . . . . . . . . . . . 7 Chapter 2 The Purpose of Gut Intuition . . . . . . . . . . . 19 Chapter 3 Wrong-Brain Thinking . . . . . . . . . . . . . . . . . 33 Chapter 4 The Structure of the Markets . . . . . . . . . . . 53 Chapter 5 Training and Trusting Your Gut . . . . . . . . . . 79 ptg Chapter 6 Trading Smarts . . . . . . . . . . . . . . . . . . . . . . . 97 Chapter 7 Simplicity and Speed: Training to Be a Master . . . . . . . . . . . . . . . . . . . . . . 119 Chapter 8 Techno Traders . . . . . . . . . . . . . . . . . . . . . . 139 Chapter 9 A Careful Balancing Act . . . . . . . . . . . . . . . 151 Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . 159 Afterword . . . . . . . . . . . . . . . . . . . . . . . . . . 169 Bibliography . . . . . . . . . . . . . . . . . . . . . . . . 187 About the Author . . . . . . . . . . . . . . . . . . . . 191 The Art of the Trade Trilogy . . . . . . . . . . . 193 Index . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 197 [email protected],e -Sckoylpleec: tiiioin.g.ocnomch From the Library of Daniel Johnson