To be competitive back when I was a broker, I had to adapt to different conditions and client requests. This inspired me to develop a set of rules for trading equities, treasuries, precious metals, energies, currencies and grains. These categories are often connected either directly or inversely. Early in my career I researched many technical tools and indicators. However, I soon realized that fundamentals move markets and technicals are useful when event risk is low.

The road to becoming a well-rounded broker/trader/educator pressed me to develop a list of tasks that I use faithfully before recommending or entering a trade. Here is my checklist:

• Sunday or early Monday preview event risk (fundamentals) for the coming week.
  • This includes economic releases, inflation, supply and demand reports, Fed policy, global events, and earnings.
  • Prioritize events that will affect interest rates.
    • Movement in rates is often connected to the dollar and stocks, which may have an impact on metals and energies. Understanding the relationship between financial sectors is vital when creating strategies.
    • The dollar tends to move in the same direction as interest rates and gold frequently moves in the opposite direction to the dollar. A strong dollar tends to weigh on the equity indexes. A soft dollar is generally positive for stocks.
• Get a read on momentum from a day view.
  • Day direction indicators reveal which direction professional traders favor.
    • I prefer a 30-minute candlestick chart for analysis. It allows me to analyze price action like I am reading a trading pit.
      • If the low is made in the first hour the pros are bullish.
      • If the high is made in the first hour the pros are bearish.
      • An extension higher after the first hour high often leads to higher prices the next session.
      • An extension lower after the first hour frequently leads to lower prices the next session.
      • A close above the first hour high often leads to higher prices the next session.
      • A close below the first hour low often leads to lower prices the next session.
• Gauge the speed of the recent move.
• If a market moves 175% of an average day range over a 24-hour period, it is deemed overbought or oversold.
• If a market moves the length of an average week in 48 hours it has gone too far, too fast.
  • If overbought/oversold think containment trade (mean reversion):
    • Better for speculators and short-term strategies
    • Short options strategies or credit spreads usually pay
  • If in a consolidation phase:
    • Recent day ranges below average with decreasing volume
    • Apply breakout strategy
    • Long options
• Select support/resistance (entry/exit) areas.
  • Markets often reverse when retesting previous high-volume prices or congestion zones.
  • Old acceleration points tend to provide support/resistance.
• Risk is an unexpected change in momentum. To set risk:
  • If bullish define price where buyers gained control, set stop loss just below it.
  • If bearish define price where sellers took over, set stop loss just above it.
• Project profit using Average True Range.
  • Find the point where bulls/bears gained control of momentum and use the average range to measure profit potential for chosen time frame (day, week, etc.)

Great traders have a routine and apply it to every trade. Overthinking can hinder opportunity, especially when volatility is high. Design your own set of rules and practice them often. Eventually, you will react to market conditions almost instinctively.

John Seguin, Martket Taker Mentoring