• 1. Manage Risk: Learn to trade a manageable portion of you portfolio (I recommend to risk less than 2% of you overall portfolio equity on each trade). Always establish a risk/reward ratio before making a trade. Without the ratio, how do you know your risk?
• 2. Understand Position Sizing: All traders must learn to know “how much” to trade on each position. Do not overtrade or you will runt he risk of ruin. Position sizing is rule number one of managing risk.
• 3. Cut Losses: Do not allow losses to run wild. You must learn to cut losses and understand that losses are a part of the game, a large part of the game. Check you ego of winning at the door. We are here to make money, not go undefeated. Play sports if you want to keep score with a record rather than your bankroll.
• 4. Learn when to Sell: You must learn when to sell. Selling is more important than buying as it ties directly to risk management. Use stops if you haven’t yet developed the discipline to get out at your predetermined stop or profit goal.
• 5. Average up in Price: I will never hesitate to add shares in a stock that is moving higher (see Mastercard) but I always avoid averaging down. Remember, cut losses and never throw good money after bad because we know that’s a quick way to the poorhouse.
• 6. Have Patience: It takes years to master trading as an advanced skill; even then, you are never done learning or adapting.
• 7. Buy 52-week Highs, not 52-Week Lows: Don’t be afraid to buy stocks making new highs. The garbage sits at the bottom of the market along with poor earnings, weakness and further downward pressure. Buy strength and the momentum moving higher. Stocks are typically priced at the levels they trade for good reason. This applies to most premium items in life.
• 8. Ignore the Talking Heads: Do not listen to the stories, gossip and rumors flying around on network television, stock forums or the major financial newspapers. It a surefire route to bad information and clueless advice. Do your own research; you’ll come out much further ahead. This applies to crappy blogs and internet sites as well.
• 9. Understand Technical Analysis: Fundamental analysis is a solid part of my trading system but technical analysis brings in the dough. You must learn, understand and use technical analysis on a daily basis. Fundamental analysis tells me what and technical analysis tells me when, where and how.
• 10. Control Emotions: Enough said – You must control your emotions or the game is over! Understand you!

Characteristics of Trend-trading Shorts

Most ideal longer term trend shorts take four to twelve months after the peak price to setup on the weekly chart with the majority of these shorts triggering between six to nine months.

• Look for stocks that had prior up-trends and support levels that can now act as downward resistance or entry areas.
• Once a stock tops and starts to consolidate, you want it to slice through the 50-d moving average and then the 200-d moving average.
• A crossover between the 50-d m.a. and the 200-d m.a. is ideal and is graphically presented on the KNOT chart
• The odds of success increase with each failed attempt for the stock price to recover these major long term moving averages.
• Head and shoulder tops can also serve as ideal setups for potential shorts if they take at least five months to develop.
• A decreasing relative strength line and a negative pattern on the point and figure chart can also confirm that the stock is rolling over and setting up an ideal short.
• Finally, volume should be increasing and the stock should be under distribution as it violates the major moving averages and starts to break former support levels.

CROX Example:

• Will CROX get Eaten?
• CROX getting Swallowed

To initiate a short sale, you must place the order with your broker or online brokerage by determining the size and price at which the trade will occur. Your broker or brokerage company will check to see if shares are available in the specific stock selected or if they can borrow the shares. Once they are available or can be borrowed, they will be sold in the open market on the first plus tick or continuation of an up-tick also known as zero-plus tick (the stock must move up for the transaction to complete). To close the short position, the broker will purchase the shares using the original proceeds and return the shares to the third party.

As a short seller, you believe that the price of a particular stock will fall in value over time. For example: by establishing a short position for 100 shares in XYZ at $50, the broker will place $5,000 into your margin account. If the stock falls over the next few weeks and you decide to cover the short at $40, you will initiate a buy for 100 shares in XYZ using the money placed in your account when you sold short. The cost to buy back the shares in this example will be $4,000 or $1,000 less than the original short sale amount. This difference in price will result in $1000 cash that will now become your profit.

On the flip side, if the stock was to jump to $60, you would most likely cover your short or have your stop loss triggered, buying back the shares at this price. The cost would be $6000 or $1000 more than the original short sale, resulting in a 20% loss. The broker would take the additional $1000 from your cash account to cover the loss in the short sale. This is how you can lose money when shorting stocks. The higher the stocks rises, the more money you can lose, theoretically resulting with an infinite loss (excluding stop losses and broker margin calls).

If the stock rises in price or if the value of the stocks you are using as collateral goes down in price, you may be forced to add cash to your margin account or cover the short sale prematurely. Keep in mind that you must pay any dividends issued while you are short a particular stock.

The two basic reasons for selling short would be to profit from a stock that you believe is grossly overvalued (fundamentally or technically) or to hedge your account with protection from a down-swing in prices due to anticipated or unexpected events. If the stock continually fails to recover these key trend lines, a further decline may be in the immediate future and you may want to profit from this action. In the second case, you may own several stocks and fear a market downturn is on the horizon but don’t want to sell for certain reasons. Instead, the investor can short specific stocks to hedge their account against possible down-turns. Some investors diversify their portfolio with several long positions and a few short positions.

A short should be covered when it rises above the 200-d moving average and certainly covered when it rises above the 50-d moving average (especially if this line is above the 200-d m.a.). If the relative strength line starts to rise, gradually making its way to new high territory, I would advise covering the short position before a big breakout occurs.

Shorting stocks may contribute to a more consistent strategy throughout up-trending and down-trending cycles. As I have said in this blog before, shorting is not for everyone and nothing is wrong with sitting in cash during bear markets, awaiting the next breakout and a fresh batch of leaders.

Many traders believe that the most obvious area to place a short would be near the peak of stock’s trading range but I have found this to be untrue. Stocks making higher highs usually continue to make new highs so stay away from this strategy.

Additional criteria for shorting candidates can be decelerating earnings and sales and a relative strength line heading down. Investors can also take the characteristics that we use for locating long positions and reverse the criteria to develop a list of possible short candidates. Even familiar chart patterns can be used to spot shorts; the reverse cup shaped base, the head and shoulders pattern and/or the flat base with a stock breaking heavily to the downside on above average volume. Industry groups that are becoming weak or are showing multiple stocks falling and breaking through key trend lines should be noted on a watch list. If one stocks looks like a short candidate, look for additional sister stocks that may have the same set-up. Remember, stocks usually move in groups whether they go up or down.

Setups for Selling Stocks Short

Most important: Always cut your losses quick! This rule applies to any strategy in the stock market.

Take a close look and you will see that I added my dog into the poker picture below!
Now, that’s what I call a good looking lab!

Bernard Baruch was a stock market speculator who became a millionaire by age 30 in the early 1900’s and eventually a statesman and advisor to multiple Presidents during WWI and WWII.

Wikipedia:

Bernard Baruch was born in Camden, South Carolina to Simon and Belle Baruch. He was the second of four sons. His father Dr. Simon Baruch (1840-1921) was a German immigrant of Jewish ethnicity who came to the United States in 1855. He became a surgeon on the staff of Confederate general Robert E. Lee during the American Civil War and a pioneer in physical therapy. His mother’s Sephardic Jewish ancestors came to New York in the 1800s and were in the shipping business. In 1881 the family moved to New York City, and Bernard Baruch graduated from the City College of New York eight years later. He eventually became a broker and then a partner in the firm of A. Housman and Company. With his earnings and commissions he bought a seat on the New York Stock Exchange for $18,000 (~$458K in 2007 dollars). There he amassed a fortune before the age of thirty via speculation in the sugar market. In 1903 he had his own brokerage firm and had gained the reputation of “The Lone Wolf on Wall Street” because of his refusal to join any other financial house. By 1910, he had become one of Wall Street’s financial leaders.

• A speculator is a man who observes the future, and acts before it occurs.
• If a speculator is correct half of the time, he is hitting a good average. Even being right 3 or 4 times out of 10 should yield a person a fortune if he has the sense to cut his losses quickly on the ventures where he is wrong.
• During my eighty-seven years I have witnessed a whole succession of technological revolutions. But none of them has done away with the need for character in the individual or the ability to think.
• Age is only a number, a cipher for the records. A man can’t retire his experience. He must use it. Experience achieves more with less energy and time.
• Do not blame anybody for your mistakes and failures.
• Every man has a right to his opinion, but no man has a right to be wrong in his facts.
• I made my money by selling too soon.
  I never lost money by turning a profit.
• Most of the successful people I’ve known are the ones who do more listening than talking.
• Never pay the slightest attention to what a company president ever says about his stock.
• Whatever failures I have known, whatever errors I have committed, whatever follies I have witnessed in private and public life have been the consequence of action without thought.

Please note that these simplified quotes don’t even scratch the surface of the contents of this book - it may even be an insult to list so few.

I was able to pinpoint a few interesting candidates tonight with VISN as my highlighted stock, a stock that has made multiple blog posts since May.

Visionchina Media (VISN), 18.13, a stock I have been starting to profile in multiple blog posts over the past month as it seems to be getting support at the 50-day moving average. It was up almosy 10% today on volume 79% larger than average. It did slide to close the day but looks to be trading in an opportunity area. $15 to $18 is an area to grab shares.

6/4/08: VisionChina Media, Inc. (VISN) - $18.84

Potential Trade Set-up:
Entry: $16.00
Risk is set at 1.0% of total portfolio or $1,000 of $100k
Stop Loss is 10% or $14.72
Number of Shares: 781
Position Size is $12,500
Risk is $1.28
Target is $30 for a 10-to-1 risk/reward ratio.
A move back to $23 with a buy at $16 would be a 5-to-1 risk/reward trade.

Stocks making multiple screens tonight:
CVLT, MA, PPO, PSEM, SLH

Stocks of Interest:
AVAV, EIG, PPO, SLH, SXE, VISN

Aerovironment Inc. (AVAV), 28.64, the stock gapped up for a 14.79% gain today on volume 502% larger than the average. It looks as if the momentum is about to turn-up on this stock as it is now in new high territory

Employers Holdings (EIG), 20.39, the stock was up 2.21% on volume 43% larger than the average as it is now trading above the 200-d moving average. Up more than 30% since February.

Polypore International (PPO), 26.42, up more than 10% today on volume 38% larger than the average as the stock looks to make a new all-time high. It has more than doubled since the fall-out after the IPO debut last summer. Buys along the 50-d m.a. are ideal.

Solera Holdings (SLH), 27.85, up more than 5% today on volume slightly larger than the average as it continues to trend higher (ever so slowly).

Stanley (SXE), 33.20, an interesting stock that seems to be building a cup shaped base over the past seven months with some support at the 200-d m.a. Have some trouble with studder-steps in recent weeks but overall, the chart catches my eye on a weekly view.

(IPI) Intrepid Potash, Inc.

• 4/24/08: Intrepid Potash, Inc (IPI), $49.09
  

  “I missed the HUGE up-trend in POT but IPI may give this industry one last run before the trend is over. Markets are not efficient so the greed of crowds may take this IPO higher due to the recent performance of POT.”

  “I will not hesitate to jump on a trend if IPI starts to run higher because crowds are persistent and I don’t like to fight them.”

• 6/9/08: Watchlist and Stock Portfolio Update
• 6/2/08: Top Rated Stocks
• 4/25/08: Portfolio Snapshot: Growth

(TITN) Titan Machinery Inc.

• 6/2/08: Top Rated Stocks
  

  “TITN – 24.30, Titan Machinery Inc. is still making new all-time highs but did run into some selling pressure near the $26 level. The trend is higher and I am holding until told otherwise by the charts.”

• 5/19/08: Portfolio Stocks on the Move
• 4/25/08: Portfolio Snapshot: Growth
• 4/29/08: Young Stocks Moving on Volume
• 4/21/08: Titan Machinery (TITN)
• 2/25/08: Stocks Catching my Eye - TITN: $19.70
  

  “MTL is no longer a buy since it has become extended but TITN and RIO may be setting up for new 52-week highs.”

This information tells me that the market is currently facing some resistance or profit taking near new high levels. However, these same stocks facing some resistance now may be ready to take-off once the weak holders are shaken out of their positions. Ideally, that is exactly the type of trade I am looking to enter as I love stocks making new highs with no resistance in sight.

Stocks making multiple screens tonight:
AIMC, BLT, CF, CRK, CSIQ, FSIN, HK, HP, LL, MCF, NOA, OMGI, PPO, PQ, RSG, TITN, TRA, VAR, XCO and XIDE

CSIQ and PPO made four screens and TITN made three.

Canadian Solar (CSIQ), 47.00, was up 10.69% today for a two day total of 20.51% on above average volume. Volume was 171% larger than the average on Tuesday and is already above average for the week. The stock is now within 3% of a new all-time high. I do have a major problem with the intraday action which had the stock close in the lower end of the daily range (lower half of the daily candlestick). This type of action suggests some selling pressure near $48 or the buyers from last month looking to break even. A move to new highs later this week is bullish.

Polypore International (PPO), 25.38, reached a new all-time high intraday with a 4.49% on volume 187% larger than the 50-day average. As the case with CSIQ, the stock didn’t close at the top of its range which concerns me slightly. Overall, the young stock looks solid as it is trending higher with a new double top breakout on the point and figure chart. Relative strength is rising as the company lives in an interesting industry group.

TITN, Titan Machinery (made three screens) was up almost 11% on volume 509% larger than the average closing at a new all-time high. The stock is now up 30% since the original analysis on April 21, 2008 at $23.97 (the ideal trade setup was noted at $21.00 which the stock did drop down to). A buy on a move back above $21 would give you a current gain of 47%.

Vanceinfo Technologies (VIT) is a stock that I noticed for the first time today as it was up 3.37% on volume 122% larger than average. VIT made the IPO screen and interesting stocks within 15% of a new high screen. The Chinese stock interests me as it has more than doubled in price over the past three months and is now flirting with a new all-time high.

This is exactly how I dissect my screens each night – I look for stocks that are up more than 1% with volume at least 50% larger than the average. Stocks making multiple screens are viewed first but every chart is analyzed.

• Fundamental Screens and Scans
• My Screening and Buying Strategy

Stock Featured Today:
(LNN) Lindsay Corp. - 125.82, The stock is up about 400% over the past two years with 300% of that move taking place over the past twelve months. Not a bad stock as the company manufactures and sells automated agricultural irrigation systems that enhance or stabilize crop production while conserving water, energy, and labor.

Disclaimer: This is not a buy list; please do your own research and buy/ sell at your own risk!