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    Friday, April 25, 2008

    Morning update


    Today we have the Consumer Sentiment # out at 10 am. Reader will recall that I don't get involved solely on economic data, but that it is often a catalyst to trade in my overall game plan. That plan consists of looking for potential short side trades in stocks, and long side commodities plays. For now, it looks as though the US$ might have found some stability or slightly stronger levels. If this is the case, commodities might have some more downside, albeit limited, before they resume the bull move. Stocks, however, could very well run out of steam in the short run. It's just a matter of timing, and the instrument I choose (which is secondary). With the US taking a break from the steep decline, I'll probably focus on the emerging markets to short (EEM short or EEV long). Most have rallied back to shortable levels already, and with US stocks attracting liquidity, emerging markets seem to be the best candidates for selling.

    The above paragraph sums up the analysis of WHAT to trade. It's really not any more complicated than that, except for the more important topic of risk control. Controlling risk through proper position sizing is probably the single biggest downfall of most traders. If an individual is right 98% of the time, but risks everything on each trade, he or she will eventually go broke for sure (100% probability). This fact is an absolute. This example simplifies the situation, but think of this, how many traders do you know that are correct on 98% of their trades? The probability that this trader WILL go broke is a fact every trader should understand. Too much time is spent on analysis of trade setups, and not nearly enough on trading in and out properly. Almost as important, ask yourself if you have a consistent method for adding to winners? Larger size on winning outcomes will significantly increase a traders' returns, even if he wins less than 50% of the time. Review your plan, and be sure these basics are addressed.

     

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