Your Checklist Before Entering a Trade

Growing up I was passionate about sports; baseball was my favorite. I loved the game and practice. I never had enough ground balls, fly balls, pitching and batting. My obsession to be the best was not a chore, it was fun. I have taken that passion and applied it to markets. If you want to be a pro, practice like one. Practice builds instinct.

I started my analytic career as a technician and soon realized that a fundamental view of the markets was just as, if not more, important than charting techniques. The road to becoming a well-rounded broker/trader/educator forced me to develop as list of tasks (practice) that I use before entering a trade. Here is my checklist:

  • Weekend 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.
      • Current tendencies…treasuries and gold tend to move inversely to equities and energies
  • Get a read on momentum from a day view
    • Day direction indicators
      • 30-minute chart to check first hour high or low during regular trading hours
        • If low made in first hour, bulls are in control
        • If high made in first hour, bears are in control
        • Extension higher after first hour high often leads to higher prices the next day
        • Extension lower after first hour frequently leads to lower prices the next day
        • Close in upper quadrant of day range often leads to higher prices the next session
        • Close in lower quadrant of day range 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 zones (congestion areas)
    • Old highs and lows often get reversals when first tested
    • Prices where a fundamental event occurred tend to incite reversals when retested
  • 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 point where bulls/bears gained control of momentum and use 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 instinctively.

John Seguin, Market Taker Mentoring

Trader Education