When I started my analytic career as a technician, I soon realized a fundamental view of the markets is just as if not more important than charting techniques. This inspired me to develop a set of rules for trading equities, treasuries, precious metals, energies and currencies because these markets are usually connected.

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

• Sunday or early Monday preview event risk (fundamentals) for the coming week
  • Economic releases, supply and demand reports, Fed policy, global events, 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 strategy.
    • A move in the U.S. dollar index usually follows interest rates.
• Get a read on momentum from a day view
  • Day direction indicators
    • 60-minute chart to check first hour high or low during regular trading hours
    • If low made in first hour, bulls have an advantage
    • If high made in first hour, bears have an advantage
    • Extension higher after first hour high often leads to higher prices the next session
    • Extension lower after first hour frequently leads to lower prices the next session
    • Close above first hour high often leads to higher prices the next session
    • Close below first hour low often leads to lower prices the next session
• Gauge the speed of the recent move
  • If overbought/oversold think containment trade (mean reversion)
    • Better for speculators and short-term strategies
    • Short options to collect theta
  • 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 very high-volume prices and very low-volume areas
• Set risk
  • Risk is an unexpected change in momentum
    • 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 ATR
  • 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 create a methodology 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, Market Taker Mentoring