Trading Rules

1. Trend recognition simply by eyeballing basic price charts. Look for classical chart patterns. Draw trendlines. Pay no attention to technical indicators. Be honest in interpreting what you see. If its not entirely clear at first glance what the trend is, then there probably isn't one and you should avoid that market.

2. Trend following. Trade trending markets only. Rise above the noise (short term volatility) by keeping positions small.

3. Precise and prompt entry upon seeing trade signals. Take all signals but be mindful of correlation risks.

4. Fuzzy exits - wait for original pattern to be invalidated before exiting. Do not bail out at the first sign of trouble. Give your trades a chance to perform.
5a. Avoid incessant pyramiding. This is the surest way to turn winners into losers. Better to ride a small position and capture a big trend than to run a big position and keep getting stopped out along the way. (The 2+1 rule = Do 2 "units" on entry. When trade works, wait until new price level is insulated from original entry point, then add 1 "unit". After that, STOP. No more).
5b.Never add to losing positions. This is how inexperienced traders implode. Constant practice of 5a also helps develop habit of strict adherence to 5b. If the original trade is not working, chances are that it was wrong to begin with so why add to it?

6. Trade many (uncorrelated) markets. In addition to the benefits of diversification, this will increase your chances of latching onto a developing trend. Do not develop a preference for any one market over another. Treat them equal. Avoid cognitive biases.

7. Trade purely on chart patterns. Recognise that you will never have full knowledge of fundamentals and trading decisions based on partial facts is no better than useless. Logic and reasoning can also lead to inertia in the face of difficult markets.

8. Reduce risk by at least half on the day of an adverse overall portfolio P&L spike (added on 12Apr08). This acts as a kind of safety release to protect against fuzzy exits blowing us up. [For more on this, use the Search Blog box for "P&L Spikes"]

Water and Credit Card Play

Keep these on your radar.

1. Energy Recovery, Inc.
(Public, NASDAQ:ERII) -
about: Energy Recovery, Inc. is a global developer and manufacturer energy recovery devices utilized in the water desalination industry. The Company operates primarily in the sea water reverse osmosis (SWRO), segment. SWRO uses pressure to drive salt water through filtering membranes to produce fresh water. The Company’s primary product, the PX Pressure Exchanger (PX), is an energy recovery device employed within SWRO desalination systems. The PX device utilizes the principle of positive displacement and isobaric chambers to achieve an efficient transfer of energy from a high-pressure waste stream, the reject stream, to a low-pressure incoming feed stream, effectively recycling energy that otherwise would have been lost. The Company launched PX-260 during the year ended December 31, 2007.
* ipo 7/11
* water play. about
* has customers world wide
* i'd wait for it to start breaking out for confirmation

2. Asset Acceptance Capital Corp.
(Public, NASDAQ:AACC
about: Asset Acceptance Capital Corp. is engaged in purchasing and collecting defaulted or charged-off accounts receivable portfolios from consumer credit originators. Charged-off receivables are the unpaid obligations of individuals to credit originators, such as credit card issuers, consumer finance companies, healthcare providers, retail merchants, telecommunications and utility providers. The Company purchases and collects charged-off consumer receivable portfolios for its own account. From January 1, 1998 through December 31, 2007, it had purchased 853 consumer debt portfolios. On April 28, 2006, Asset Acceptance Holdings, LLC completed a stock purchase transaction of Premium Asset Recovery Corporation (PARC). Under the terms of the agreement, Asset Acceptance Holdings, LLC acquired 100% of the outstanding shares of PARC. Asset Acceptance, LLC purchases and holds portfolios in all asset types except for healthcare. PARC purchases and collects on portfolios primarily in healthcare.
* makes money off credit card debt. these guys buys buys in bulk accounts from banks/credit cards that have people not paying their debt for a highly reduced cost. they make money on the spread.
* credit card play
* i would wait until financials has bottomed or volume in this guy starts picking up because it's following the banks right now.

Possible Short Term Bounce in Financials Coming?

Today, securities regulators issued an emergency rule on Tuesday to limit certain types of short selling in major financial firms, including Fannie Mae and Freddie Mac.

The rule is the latest effort by the U.S. Securities and Exchange Commission to clamp down on market manipulation that some blame for the sharp declines in financial stocks and the demise of investment bank Bear Stearns in March. The rule will go into effect on Monday, July 21, and last through July 29, although it could be extended to last up to 30 days. The SEC said it will consider rules to address short selling issues across the entire stock market. The emergency rule applies to 19 financial firms including Lehman Brothers, Goldman Sachs, Merrill Lynch, Morgan Stanley, JPMorgan Chase & Co and Citigroup Inc.

To take advantage of this trade if a possible short covering + bounce in financials is coming is the ProShares Ultra Financials (UYG) ETF. Prior to June 24, 2008, the fund had never traded more than 50 million shares in a day. From June 24 to July 10, it traded more than 50 million shares 3 times. It’s traded more than 50 million shares each of the last 4 trading days, including a record breaking 105.3 million shares today.

UPDATE 7/18/2008:
WOW. UYG ran 35% from the time I called it. I recommend taking profits and waiting for financials to bounce with long term holders than short covering.