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Citi Group is perhaps one of the few losers that are close to Leahmen Brothers and Bear Sterns. It has been a fantastic mover for the bears. I admire the courage of the bears that rode it all the way down to this level.

However in reality, there are far fewer bears than the bulls. Most people like to go long especially when stocks have been brutally beaten down. To those perennial bulls, it is just very un-natural to profit from the bear side. This kind of feelings is very normal. I believe you do not have to play the short side to be a great trader. You can be a great net long trader as long as you know when you need to stay out of the market. In other words, you never try to catch bottoms, which is a fool’s game.

Here is one of my own battles that can prove at least 2 things.

• cut losers
• stay out of them.

Citigroup(C): How I avoided losing everything by losing only 18%

I took this Citi trade back in Sep. 2008. I opened a long position around 1 and it was stopped out around 2. It was an 18% loser. 18% was a bit wide for me. But my position was kind of small. So the overall loss was fine. Another reason why I used such a wide stop loss was that it was super volatile back then. I took this trade for 2 reasons, one technical and one fundamental.

1. The down trend seemed to have stopped since a W bottom was formed. Technically, I had to take a shot at it.
2. I was also thinking that it was the biggest US bank and it was too big to fail.

For me, technical analysis (TA) always triumphs fundamental analysis (FA). So I took the trade and it failed. Of course, when I got stopped out, I did not know it would tank so much. Or I would have shorted it. Look back at it. I am afraid that I have to say “I am so happy I lost only 18%”.

The second good thing is that I totally stayed out of it since I NEVER try to catch bottoms.
One last thing, your paper loss is real loss. Never ever try to fool yourself into believing “If I do not sell, I do not lose”. That kind of attitude will make you hold onto your losers and wipe out your trading account.

Now repeat with me out and loud “cut losers and live to fight another day”. If I can do it, you can do it…. BTW, I made the money back very soon by taking 2 trades in Honda (HMC) .

Perhaps, there is nothing more exciting than trading stocks for a living.   Indeed!  I have never worked a regular job more than 6 months combined in my entire life, I do not answer to anyone and I am not worried abut layoffs.  I will never trade this kind of life style for anything else.

 If you are a typical 5-9er

• You really hate it when your boss tells you to work on this and that. You do not want to be a slave anymore, You would like to answer to nobody.
• You see no future at all in your typical boring day job. You will always be that little work bee whom everyone can assign work. You are at the bottom of the food chain.
• You hate office politics. Some people can be your boss just because they are better at office politics than you. You are always the one that does all the dirty work and gets no credit.
• What you do everyday is more boring than flipping burgers.

If you become a day trader

• All the above gripes will be gone.
• You can profit in a bull market ,a bear market or even a range-bound market.
• The sky is the limit. If your system can bring home 50 dollars everyday, then it will possibly bring home 500 dollars and more.

Before you get all excited about day trading, you will have to ask yourself one simple question. Why do 99.99% of the people around me have a boring day job?

Is it risky? The answer is no. Day Trading is much safer than investing. You close all you positions before the market closes everyday. Thus you avoid the possibility of a gaping-up or a gaping-down the next morning. If your risk control is very solid, day trading is not risky at all. That is also why most brokerage houses give you a 1:4 leverage buying power for day trading instead of 1:2 for overnight. Nevertheless, I never use margin.

Is it hard? The answer is yes. The hardest part is your market psychology and discipline. It will take you a long time to master these 2 things. And I am sure that you will relapse after a few good trades. Day trading for a supplementary income is easier than for a living since you have no pressure to make the ends meet every month. Of course, if you have a consistent system to make a supplementary income , then you can easily transition to trading for a living.

One single most important thing is that there is absolutely no shortcut in trading. You will be a profitable day trader only after a tremendous amount of hard work.

Here are 10 preconditions I think you need to meet.

1. You should be available from 9:30 AM to 4:00PM.
2. You should be realistic about your gains.
3. You should know it will take you quite some time before you can be profitable.
4. You should know it will take a lot of hard work.
5. You do not depend trading for your main income,which would put too much pressure on your performance.
6. You should have at least 30k disposable income.   The more, the better!
7. You should have a decent computer , a dual monitor setup and high speed Internet.
8. You should be optimistic and upbeat about your trading.
9. You should have solid knowledge of technical analysis.
10. You should know you will lose some money in the begining, which is the tuition everyone has to pay. You are not an exception!

It is easy to get all your hardware ready. But it will take you a long time to be mentally ready. You will ride your emotional waves up and down for quite a long time.  I think the coolest part, if you can make it, is that you do not have to answer to anyone.  Good Luck!

The stock market had a big rally today. This is actually pretty predictable. I have been talking about shorting FAZ since last Thursday night on Twitter. I mentioned that we might have some opportunities to short FAZ for really fat profits (20-30% in a matter of 2-3 days). Let’s take a look at the daily charts of FAZ

As we can see that it approached the previous high on last Thursday and rose from 40-80 in a matter of a few days . Forget about the fundamentals and forget about that we are a in a big recession. Technical analysis says you do not have good set-ups on the long side of FAZ and your risk-reward-ratio would be totally out of proportion if you do.

 My first attempt to short FAZ was on Friday. I had a relatively big position (50k worth). But it did not hit my target. Percentage wise, it was a small winner compared with today’s. Now let’s take a look at my FAS trade today since FAZ was not shortable. I only took one trade and it was up 26%. You do not see this kind of big day trading movers everyday. How on earth did I have the willpower to hold on it? We will come to that part later. Let’s take a look at the entry. A good entry is half a battle.

For frequent readers of my blog, you know I like this kind of entries very much. That is to short double tops and long double bottoms. Of course, I also like wedges, pennants, flags, and cup-and-handles. My entry was after a W bottom formed at 2. That entry was fine. However, if you entered around 3, that would make your entry perfect since that bottom completed the famous header and shoulder pattern if you include the bottom yesterday, which is 1. If you did not include 1, then bottom 3 and bottom 2 formed a double bottom on today’s chart. No matter how you slice it, there were very strong entry signals.

How on earth could I hold onto it for so long?

Normally, I have 6-7% profit targets for day trades. But it was not the case for this one. I aimed for a much bigger profit. I have been talking about big profits in shorting FAZ since last Thursday night. Why would I barge for a 6-7% gain? How did I cope with my emotions? LOL, I went to nap after I moved my stop loss to break even and when I woke up. Voilà! it was up big nice. It never had meaningful retraces, which made it easy to hold onto it. Had it gone down, I would have been stopped out break-even. That is my stop loss would do its job. It was also attributed to my small position (around 13k). I would have made 10k if my FAS position today was worth 50k like the FAZ trade I took last Friday. But I might not have been able to control my emotions well.

Here is the summary.

1: followed my plan
2: total conviction. When a trade is in motion, I never listen to anyone or anything including any news.
3: a small position.

My only swing long SOHU is doing great. Here is my portfolio and my real time stocktwits

This past week was devastating for the bulls. We have broken a few key supports. Daily and weekly time frames are very bearish. The bulls could use some caution here. You do not have to trade every day. Of course this does not apply to day traders. Day traders will have to trade every day. That is what defines day trading.

Seldom do stocks drop or go up in a straight line. They zig and zag, which makes trading hard. Let’s say you are very pessimistic about our economy. You have the general direction right, which is going down. Nevertheless if your timing (entry) is not precise, In other words, you zag when the market zigs, you will still lose

If you were following me on Twitter, you know that I shorted FAZ on Friday. I also mentioned it that I would short it Thursday night on Twitter. The first 2 shorts were placed not long after the market was opened. I had a quick paper profit but I did not take it. My plan did not allow me to take that kind of profit. The stock reversed and took out my stop. So I had a loss of 1500 in the AM. I shorted it again in the PM . It did not hit my target either. I closed it before the market closed because It was a day trade. That one trade brought in 3700+, which was more than twice as much as the amount I lost.

Here are a few good things I did and I will try my best to repeat them

1. Solid risk management
2. Never try to catch tops/bottoms
3. Ride winners

In summary, I stick to my game plan and I only listen to what charts are telling me. See my real time updates on Stocktwits

Although the big picture is bearish, it does not mean there is no hope for a sucker rally next week. For short swing traders like you and me, a sucker rally that lasts for a few days is good enough. I think the probability of this rally occurring next week is over 60%(fuzzy logic ^_^ ) because the dark cloud has formed in FAZ and SRS. I am already prepared for that as we can see from my portfolio I am long on MOS and SOHU. POT and MOS are same stocks. They are the sector leaders of the fertilizer stocks. Either one is good. I think I might add one oil stock(OII) or just ERX. All these stocks are on the long side. They have something in common. It is not very obvious. Let’s see how they play out next week. I hope they can prove my theory which I will reveal in the future if it is correct. Please feel free to provide your observations in comments below

60 Min Charts. To have a better view, just click on them.

MOS

SOHU

POT

OII

Good Luck

It is good to respect risk in trading. However, if you are overly cautious, it is equally detrimental to your trading as you will see from my today’s FAZ trading.

Today, I went long on FAZ the first time. The entry was almost perfect. But I left so much money on the table. Why? I chickened out. Here is the chart. What makes trading hard is that we will have to make almost everything aligned for a successful trade.

1: a good entry.
2: a good exit
3: luck
4: willpower to stick to your plan(emotion control)

It was a text book set-up(a wedge) again. There are just so many patterns to trade. Check out the “Candle Sticks” and “Comprehensive” sections of my libray.

Here is the 5 min chart.

My entry was good, but not perfect. If I had waited a bit more, I would not have bought it on the head of that candle(upper shadow). Since this guy moves big and fast, we really do not have to fuss over a small spread like that. So the entry was very solid.

My exit was horrible. It was beyond the words. After it spiked by 2 percent, I started my trailing stop which took out of my stop. It was like a thief who stole my money and ran faster than anyone. See how big and fast it moved after shaking me out. The reason I started my trailing stop was because I chickened out. It was simple as that.

It was a brutal day for the bulls including me. The market gapped down big because of the following reasons

• Dismal economic data from Japan
• Possible downgrades for various Europe banks
• Possible bankruptcy of the Big 3 auto-makers

Day Trading: Down 1100

Swing Trading: Down 790

I was down around 1000 from shorting our beloved FAZ. My position size was a bit too big. Other than that, there was nothing particularly bad. Of course, I was on the wrong side of the game. The bears ruled all day long today. However, being on the wrong side of the game is very normal. It is just part of the business.

It was not really an easy day for day trading FAZ today. After its huge gap-up, there were not any meaningful moves in either direction. Because I am not good at scalping, I tend to lose in this kind of choppy market. The flip side is that I can catch big fish when it does move.

As for swing trading, my ERX is gone. It hit my stop loss. It was once up nice on paper and now I lost 700+. No big deal. I will try it again later.

Right now, I think I will stand on the sideline for swing trading. So should you. We have officially broken a very solid, multi-week support. If the low holds tomorrow, then we all can put on the bear hat.

I am going to place my bets on the long side for now. The Risk-Reward-Ratio is not that good on the short side. Here are a few candidates that I might swing trade. They are listed in the order of priority. Click the pictures to enlarge them. MOS Or POT. I will choose Only One. They are equally good.

MOS

POT

CRL

SBAC

ECA

OII

RS

NOV

Best Luck!

I think following is a strategy to trade all these leveraged ETFs. This strategy is contributed by a trader friend. With his consent, I post it here so others can benefit from it too.

When you’re trading ETFS, find out what the components are and watch those and the news as indicators on your entries and exits. A lot of ETFs are administered by http://www.proshares.com/, it’s easy enough to find which stocks they are comprised of and what % those play. It changes a bit every so often but it’s a really helpful indicator.

If you’re trading SRS, watch SPG in particular but also know that:

Simon Property Group Inc. 6.82%
Public Storage 5.87%
Vornado Realty Trust 4.99%
Annaly Capital Management Inc. 4.90%
Equity Residential 4.64%
HCP Inc. 4.03%

To effectively trade SRS, open two level two boxes, one with SRS the other with SPG. Study the T/S, watch what each do in relation to the other. Open a chart and overlay SRS and SPG. Finally, if your trading platform allows you to follow spreads, create a spread between SRS and SPG and watch those. It takes a day or two of a somewhat intense study, but once you’ve figured out the relationship between the two, you can makes piles of money trading SRS.

The same stands true for FAZ, although it’s not a proshare and it’s harder to find information on it. I’ve watched it for a while and find that following JPM is the most accurate way of understanding what FAZ will do.

Do not swing these and make sure you have tight stop losses in place and honour those stops. I’ve watched SRS move $20 in a day, you really don’t want to be on the losing side of that. It’s much better to lose an opportunity than lose the money.

Of course, you still need to combine this strategy with your risk control and exit strategies .

I can only do this much for now. This is what I would do with regard to all these stocks. It has nothing to do with your positions. Click the pictures to enlarge them

RIMM (Research In Motion Limited)

Sentiments: I am bearish. People who bought into it before the gap want to get out desperately. It will have very strong resistance filling the gap.

Possible actions: I would short into any rally at the first sign of resistence. Or I would short it if breaks down 47.25 with volume.

AMZN (Amazon.com, Inc)

Sentiments: I am bullish. It has a very beautiful chart in consecutive small up-trends.

possible actions. I will be waiting for it to consolidate a bit more and look for a good entry on the long side. If you already have a profitable position, hold onto it. The current consolidation is very healthy. Of course, trail your stop to protect your gains. Anything can happen in the stock market.

ILMN (Illumina, Inc)

Sentiments: I am bullish. It has a very beautiful chart just like AMZN. And it is still climbing

possible actions. I will not touch it since it has rallied too much. Current holders of this guy should hold onto it firmly until you see signs of weakness. When there is weakness, do not just sell it. Use your trialing stop.

ECA (EnCana Corporation)

Sentiments: I am bullish on this one. In fact, I might trade this one since this one would give me the best R-R-R.

possible actions. I think I will trade it. A good entry will be somewhere on Monday or Tuesday . You will see it.

MOS (Mosaic Co)

Sentiments: bullish. good chart in a short-term uptrend.

possible actions. I could open a long position now around 42.8 and set the stop loss around 39.64 or 7% whichever is smaller.

SunTrust Banks, Inc. (STI)

Sentiments: bearish.

possible actions. look for a possible short entry whenver there is a rally and a good entry would be when it rallys into the trendline .