A few decades back I began publishing daily newsletters for traders both on and off the trading floor of the CBOT. When I started this practice, I focused on interest rate markets because I was a broker in the 30-year bond arena. I prioritized and listed all the elements a trader requires to make sound trading decisions. I was fortunate enough to start my career in a sector that affected many other financial markets such as foreign exchange, precious metal, equity index, energy and even agriculture. A move in interest rates frequently ignited a reaction in other sectors of the economy. Eventually, I began to publish trading ideas for many markets using a consistent game plan.

Fundamentals First

At the top of my game plan is a list of events that may affect prices that day or week. Fundamentals move markets, so checking the economic calendar is the first step in the process. Typically, guidance or consensus estimates are published before earnings or economic events. It is important to map out bull, bear and neutral strategies on the day of the event. These days inflation reports take precedence over employment, housing or sales numbers. If an inflation report is higher than expected, interest rates tend to rise and so does the dollar. Meanwhile, stocks and precious metals have been falling under this scenario. Pro traders are aware of correlations between sectors.

Identify Dominant Player

My next task for publishing trade ideas requires me to have an opinion regarding momentum. I prefer to use 30- or 60-minute candles to gauge whether bulls or bears have the edge. Candlesticks with a long body and small wicks are an indication of dominance and often lead to continuation in that direction depending on if the candle is green or red.

Determine a Pivot Point

The next step I take is to calculate a pivotal price. The most popular way to calculate a daily pivot is to take the average of the high, low and close of the day. More important is the reason for having a critical point. One way to view a pivot is the point at which momentum changes. For example, if you are long the market you can stay with that position so long as the market closes above the daily pivot. When a trend shifts to neutral it will often be tethered to the pivot. This is where average true range comes in handy.

Basic Support/Resistance Calculation

Average true range is useful when setting support or buy levels and resistance or sell levels. If a market closes near the daily pivot measure 0.5 of an average day range (ADR) above and below the pivot to set your first support and resistance areas. If you have a bullish momentum read, then measure 1ADR above the pivot to get your profit target and resistance price. If you have a bearish bias set your profit target and support at 1ADR below the pivot. 

Practice for Perfection

Competitors practice for perfection, yet perfect games and trades are rare. We can improve our chances of success through diligence and structure. Challenge yourself by publishing your thoughts. Each day before the markets open, get in the habit of writing out your strategy for the day. A few bullet points are all you need. Start with a read on momentum. Set price goals (support and resistance) and define risk. Review your journal after the close. This practice should make you a better trader in an extremely competitive environment.

John Seguin, Market Taker Mentoring