Trading is the combination of art and science

The biggest news today is from Warren Bufett. MarketWatch news -- "Berkshire Hathaway Chairman Warren Buffett said Wednesday that 40 of America's richest people publicly pledged to give away at least half their money to charity, a move that could pump about $60 billion into the world of philanthropy". Frankly, I really want to be part of that, only if I have that much of money.

S&P500 index rose 6.78 points, closed at 1127.24. Stocks rose today on good economic data and upbeat earnings reports. The trend is higher and Tuesday was an inside day (traded within the range of Monday).  The market took out the low end of the range on Wednesday and reversed to close above the high end of the inside day.  This leads to a positive setup for Thursday, especially if the Wednesday high is taken out.

This type of pattern can also lead to a sell opportunity if Wednesday's high holds and the low on Tuesday is taken out.  This is often a very reliable trade, as those who went short on Tuesday will be defending that high and new long will likely sell if the lows are taken out.

 I see a possible wedge forming on the daily charts. Volume has been steadily declining on the rally from early July, which adds to the reliability of a wedge. The up trendline will have to be broken before a short trade can be placed.  This could be a great shorting opportunity or the market could continue the same old trick- climb higher on low volume. Stay with the flow until it changes.

when I dealing with day to day errand, I take risk, trading stocks take risk too, but the positive side is I can control risk to a minimum level. For example, if I want to short the current market, I have two way to do it.

Firstly, I can place my short order at SPX 1140-1150 area and place the stop loss at around 1155-1160. Secondly, I can place a sell stop order right below the trendline support which is around 1100 and cover it when it drop down to 1185 which is the 50 days moving average support.

Now, we take a look at the pro and con of two methods.

The first one I short when the market is on its way up, a little disadvantage, but remember, I always place a short order at a critical resistance area. That mean the successful rate is very high, also I will place a protective buy stop loss order right after the short order is triggered so as to limit the loss and protect the capital.

The second method is a lot safer because I short when the market is falling, the risk is very low but the profit is way lower than the first method.

Method one's profit potential is much higher than method two. If I short at 1140, market drop to 1100, I gain 30 points. With method two, I short at 1100 and cover at 1085, the gain is 15 points.

Of course, there are some more factors we have to consider, like the risk reward ratio, that is how much you are willing to sacrifice in order to earn those points. As I always say, trading is an art and it also a very accurate science.

I think I am talking too much about method one and two, because after spending too much time to talk about them I will still using method one. Tomorrow I will place my short order at 1140 again.