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NEW YORK (MarketWatch) -- The Chinese have a saying, "May you live in interesting times."
I suppose we should be careful for what we wish.

After years of credit consumption, asset-class inflation and dollar devaluation, we've arrived
at the crossroads of our new financial fate. There are two potential paths, independent in both
preparation and consequence.

We've long offered the view that to understand where we are, we must appreciate how we got
here. The stakes have been raised, however, as it's no longer enough to recognize the debt
dependency, derivative machination and structural imbalances. We must now apply our
experience and extract the proper response.

As the disconnect between credit and equity comes to a head in front of what promises to be
a massive move, I humbly submit 10 tips for a tough tape.

Shorten up on the risk stick

We've arrived at a reactive mindset where traders get bullish when screens are green and
bearish when red spreads. They're chasing the tape both ways, and it's a recipe for
frustration if you're a half-step slow.

I've adopted a much shorter time horizon on my exposure, flattening whenever possible at
the end of the day and operating within the context of defined risk. This wasn't a viable
strategy during the years of dormant volatility, but opportunities abound given the current
two-sided swings.

You can learn a lot just by watching

Over the past few months, some of my best trades were found by simply watching the
opening. When a stock or index trades flat to higher in the face of heavy futures, it speaks to
the underlying demand. A flat to lower open in the context of upside gaps typically implies
supply.

My vehicle of choice on many of these occasions has been Baidu , but the approach applies to
virtually any instrument. Incumbent in this methodology is the ability to remain patient,
adhere to stops, and understand that the ability not to trade is as important as trading ability.

The dynamic duopoly

When Goldman Sachs Group Inc. and Google Inc. are pointing in the same direction, the tape
has a tendency to follow.

The bellwether tells change with time. For many years, Citigroup Inc. and the four horsemen
of Intel Corp. , Microsoft Corp. , Dell Inc. and Cisco Systems Inc. shaped the tape. As it now
stands, Google and Goldman are key reads when trading in tandem.

Don't confuse volatility with information

A few weeks ago, a financial television station reported that the bond-insurer bailout was
imminent. That sparked a 600-point short squeeze in the Dow Jones Industrial Average . The
package wasn't announced despite rampant speculation regarding the implications for the
marketplace.

This is an isolated incident but speaks to an important point. When the tape rallies, bullish
elements are fingered as the obvious cause. When the market sinks, bearish inputs are
championed as the clear culprit. There will always be two sides to every trade, and the
residual friction will dictate tomorrow's front page.

Don't assign reason to the rhyme. Assimilate the metrics, weigh the probability spectrum and
always allow for an ample margin for error.

Synch your time horizon and risk profile

One of the steady saws in the marketplace is to sell hope and buy despair. When folks are
euphoric, the reasoning is already established. When they're despondent, bad news is often
priced into the tape.

Our current juncture is a prime example. The haunting headlines are highlighting many of the
risks that the market has already discounted. That could work for an upside trade, but the
debt unwind remains in the early innings of what promises to be a long and hard-fought game.

One of the toughest tricks to master is the ability to juxtapose your time horizon and risk
profile. The market trades in nuances, trends, phases and cycles, and each requires a
different approach to effective risk management.

Let history be your guide

The mainstream media are filled with folks asking the Federal Reserve to save the day. It is
reminiscent of the mindset we saw following the implosion of the tech bubble in 2001. The Fed
eased, sentiment briefly bounced, and the S&P proceeded to fall 40%.

Perhaps a more daunting analogy can be drawn as we step back and digest the macro-
economic landscape. You don't have to agree with the potential path but most certainly
ignore it at your own risk.

Emotion is the enemy when trading.

That's one of our principal trading commandments that bears repeating as we weigh the fray.

The current crush in the marketplace is the love affair with commodities. It makes sense,
right? There's inflation in things we need to feed and power the world and deflation in things
we want, such as cell phones, laptops and plasmas.

This has been a profitable play in a big way since the dollar started its 40% devaluation in
2002. When wandering eyes start sizing up the prospects for deflation, however, broken
hearts will litter the landscape. Commodities may outperform on the downside, but you can't
spend relative performance.

If you're late to this trade, consider staying on the sidelines and awaiting a more
advantageous entry point. Opportunities are made up easier than losses, and it's never a
good idea to run with the herd if you don't know where the cliff is.

Ready, fire, aim!

There are trades for the day, trades for a thesis and trades for a catalyst. Regardless of the
set-up, an exit strategy must exist before you pull the trigger and initiate risk.

Use quiet time to create a laundry list of longs and shorts, complete with technical levels and
potential catalysts, such that you've got a roadmap when the time comes.

And never rationalize your positions. The definition of an investment should never be a trade
gone awry.

Recession is a mindset

A great debate continues to rage regarding whether we're in a recession. I have news for
you, folks: It doesn't matter.

The conventional definition of a recession is back-to-back quarters of negative GDP. There
are two critical points to process. First, by that criterion (and after final data revisions), we
never entered a recession in 2001, despite the S&P's getting cut in half. Second, the market is
a discounting mechanism that will price in the risk long before economic validation arrives.

I'm of the view that we're already in a recession, one that's been masked by the lower dollar
and skewed by the spending habits of an ever-slimming slice of society. Whether you
subscribe to that notion is academic.

Numbers don't dictate our destination. Societal moods and risk appetites do.

It's tough out there. Tension is mounting on Wall Street, stateside friction is growing ahead of
the election, and geopolitical angst is manifesting around the world. It's enough to make you
want to turn it off. If only it were that easy. And if only that were an option.

The landscape will continue to shift -- for better or for worse. Lamenting about our lot in life or
worrying about what will be is wasted energy. Focus on solutions, be it opportunities in the
marketplace or capital preservation and risk reduction.

There will be winners in the new world, and there is no reason we can't be among them.
Perspective is crucial as we find our way and do the best we can. With a little luck and a lot of
discipline, we might even enjoy the journey.

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