Rules of the Game

Do not be afraid to sell profitable positions and protect winners by not allowing them to become losers.
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If you are going to trade well, there are a few things you absolutely must do. The most important -- and most obvious -- is to trade with the trend. If you take a long, hard critical look at your trades (and I absolutely suggest that you do this on an ongoing basis), you will quickly come to realize that the vast majority of your winners will be net bullish plays in rising markets and net bearish plays in falling markets.

This is not to suggest that there are not valid strategies to take advantage of special situations. These strategies exist but they are far less likely to be profitable. Understand the trend of the market and enter trades accordingly.

The second thing successful traders do is, they do not allow profitable trades to become losers. This sounds simple but very many novice traders become fixated with "being right", even when that hurts their bottom line. They will ride winners up and then down, betting the reversal in price is temporary. Do not be afraid to sell profitable positions. Protect winners by not allowing them to become losers.

All of this is a prelude to my interpretation of where we are in this market and what I feel is the most appropriate course of action. At SPX 1040, I suggested reeling in net bearish positions, because the risk of an upside reversal was high. Bulls had been pushed to their line in the sand. They had to make a stand as SPX 1040 because failure would mean a decline to below 1000. Bulls responded.

Right now, bears are in the very same position. SPX 1130 is their line in the sand. They must respond or risk a dramatic rally to 1181 or higher. Bears are going to respond. They have no other choice.

The bottom line is that the "easy money" on the long side has been made. If you have net bullish winners consider reeling in some of your profits here and protecting the rest with stops.

Today I am closing net bullish positions for Fuel Systems (FSYS) , CME Group (CME) - Get Report and Google (GOOG) - Get Report. I am long FSYS October 30 calls from $2.90. That option is currently in the $5.10 range. I am long CME October 280 call from $1.80. That option is currently in the $4.70 range. Finally, I am short GOOG October 470 put from $18.60. That put is in the $11.20 range.

Trades: Sell to close FSYS October 30 calls at $5.00 or greater, sell to close CME October 280 calls at $4.60 or greater and buy to close GOOG October 470 puts for $11.30 or less.

At the time of publication, Terry Bedford was long FSYS stock and long FSYS calls, long CME calls, short GOOG puts.

Terry is the Founder and President of Bedford & Associates Research Group. Terry writes for AOL Finance and MSN Money and is regularly quoted by the financial media

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