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    Monday, May 19, 2008


    At some point this week I'm looking for stocks to weaken. It's doesn't matter whether it materializes or not, but rather how I trade if it works vs. how I trade out if it does not. Many readers ask which indicators I use. My philosophy is to keep it simple and find something that makes sense to you. The best indicators are still wrong 40%(+/-) of the time. Your profitability is determined by how much you lose during the rough patch. The best advice I can give regarding indicators is to pour through charts until something feels like it makes sense.
    Incorporate that tool, along with a few others, always reminding yourself that indicators are a very small part of the whole trade. Almost every indicator in existence has some statistical significance, so try them out, but rely on risk control and bet size in the end.

    I've mentioned before that it's not necessary to have 50 different "potential trades" each morning. In fact it's detrimental, in my opinion. Best to focus on a few good ideas, and how you'll trade through various outcomes. Along those lines of thought, I'm specifically stalking the short side of real estate etf (IYR short, or SRS long), the Russell 2000 etf (IWM short, or TWM long), and possible the emerging markets etf (EEM short, or EEV long). None of these is perfect, then again, no trade is perfect! I might also get a signal to add to the WEAT etf on the London Stock Exchange. As always, I'll inform of trades taken on the 'ticker', as they occur.

    Regarding position sizing, I'll soon have a page dedicated to how I determine proper sizing. This will include the definition of a "unit". Some ask why I don't trade individual stocks more often. I do trade highly liquid names (ex. AAPL), but on less liquid vehicles, trading my typical size can be prohibitive. As your positions get bigger, you'll find you have to stay in "larger pools" to swim. Pay special attention to the number of units, and how that changes throughout the trade. For now, it might help to know I typically risk 1% of overall portfolios assets on any one trade (slightly more when I have multiple units).


    In the future, I'll try to link to some great blogs that discuss related topics. Readers know I'm a big fan of trader psychology, so Dr. Steenbarger's "TraderFeed" should be in your favorites, along with TraderMike's simple, but effective charting.

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