Can MSFT Buoy the Market?

This week we've been looking at some of the common traits shared by successful traders.

On Monday, I mentioned that good traders know what they are good at ... and they stick to their areas of strength. On Tuesday, we focused on the one thing that drives all good traders -- the desire to make money. That's the only reason a good trader trades. Poor traders trade for myriad reasons ... all but one of which is the wrong reason. Trade to make money, or don't trade at all.

On Wednesday, we discussed the notion that a good trader is a perpetual student of the market. If you stop learning, you'll stop growing.

In yesterday's column, I mentioned the importance of thinking globally. While a daytrader can get away with thinking solely about the immediate dynamic of supply and demand, the vast majority of traders must think across sectors, industry groups and markets. They must understand the impact of events and situations far removed from the tickers they own.

Today, we focus on the one thing that most successful traders always consider when taking a trade: the downside. Successful traders tend to think of themselves as risk managers. Of course, they expect to make money in the trade. That's why they are making it! But successful traders always think about what they can lose on the trade.

They take the trade only if the potential loss is acceptable. They don't think linearly; they tailor the trade to the risk. Perhaps they trade smaller, perhaps they hedge, perhaps they take a "wait and see" approach ... or perhaps they just take a pass.

When you trade, are you always considering the downside, or are you just assuming that the trade will be a winner? Perhaps it's a stock that was recommended on TV? After all, if a guy is on TV and says he likes a stock, then he must be right, right? Wrong!

Take responsibility for your own trade, and always consider the worst-case scenario. Tailor your trade so that the worst-case scenario is something that you can live with. If you can't, then don't take the trade.

Let's get to today's charts.

Microsoft blew away earnings estimates after the bell and opened up higher this morning. But the real test for this stock will be the close. The S&P is a bit tired, as I noted in a video yesterday after the close. Perhaps Microsoft has the mojo to push the S&P higher. We'll know the answer to that question at 4 p.m. EDT today. If you're long, consider putting a stop just below $31 and letting the position run a while.

This daily chart of EMC is a lesson in patience. I remember how Jim Cramer was talking up EMC last summer when it was just below $20. The stock just churned incessantly until I began to see postings on Stockpickr.com about it from investors who were just getting tired of sitting on the stock. Frankly, that was a great indicator of a pending breakout.

When the crowd gets restless, their selling is usually the last of the supply before the stock breaks higher. Since that breakout, EMC has just continued to run. The past couple of weeks have given the crowd a chance to take profits. Now the stock is moving higher once again.

This weekly chart shows Rambus as a pretty good short-sale candidate ... or at least a stock that you don't want in your portfolio. Consistent resistance has been at $22.50; but this recent run didn't even make it that far. As such, the intense supply at $22 is still too much for the bulls to absorb. So if you're long, why not just let the stock go and wait for a better setup -- either a pullback to test support, or a breakout above resistance?

L-3 Communications has recovered nicely from the August selloff and has begun forming a new trading channel. With support at $102 and resistance at $108, you know what to do. A breakout above resistance starts the next leg higher. But a pullback to $102 also works because you can buy the stock so close to the bottom. If it then falls below $102, it can be sold for a small loss.

When the fires began raging in Southern California, one of the first market-related things I thought of was the Ionic Breeze, a popular air purifier distributed by Sharper Image.

I recalled that four years ago, during the last big blaze, SHRP rose on anticipation of massive sales. The same thing happened in the aftermath of the 9/11 terrorist attack on our country. Where there's smoke, there's the Ionic Breeze. But that trade is now over. A move from below $2 to over $3 in just a week is enough to satisfy the greediest bull. Close out the trade and move on.

Be careful out there.