You have a plan of attack for the market, called your trading plan, and it should lay out the strategies you’ll use, how you’ll manage your money, position size as well as some rules and guidelines for your trading. But no two days are exactly alike, while we do our best to prepare, there may be subtle changes in the market each day that may affect our strategies. I am not a fan of blindly following a strategy and trying to fit it to every market condition. As primarily a trend trader I only want to execute my strategies in trending markets, therefore I have developed a little checklist which helps me focus on if the market is trending, in which direction and what I can expect from the day.
The checklist items work together to help confirm or deny trading opportunities.
- What is the long-term and short-term trend: For me long-term is basically the overnight session, maybe a bit of a prior day and the new session. Short-term is the last 30 minutes to an hour or so. Ideally, I like trades where there is a shift in momentum on the short-term that aligns with the long-term. The question to ask is, what is the overall expectation, and what is the immediate expectation? I take trades based on immediate expectations, but if that goes against the overall expectation then I am much quicker to bail on the trade at any sign of trouble. If I am trading with the overall expectation, I am more inclined to give the trade some room.
- Is the market exhibiting some sort of pattern? What may look like trend may just be a piece of a larger wedge pattern or range. Drawing lines on the chart along highs and lows will help isolate if there is are any patterns present. Pay attention to these.
- Is there strong support or resistance anywhere? These are areas that have caused the price to shift very strongly in the opposite direction. Be care of strong bounces off these levels.
- In which direction are the strong and weak moves? If all the really strong sharp moves are up, and all the weak moves are down, probably best to be trading on the long side until that changes (see: How to Trade the Trend and Spot Reversals).
- How volatile is it? On a very slow day your profit expectations will likely be less than on a very volatile day. Base your targets and stops on the price action you have seen so far. You can only trade what the market is willing to give.
- Would the strategy have worked already? If a few signals already occurred before you started trading, would those have worked out? If the market doesn’t seem to be respecting your strategy parameters, wait till it does. This may mean missing one trade, but it is better than trying to impose a strategy on a non-complying market.
- Are there repeating tendencies? This one takes quite a bit of focus because you need to realize it in real-time, but are there repeating price movements? For example, the price moves higher, stalls, and then makes three attempts to move higher before finally breaking out. Next time the price moves higher, the same thing starts occurring. Finding certain tendencies can give you a little extra confidence for a trade, but don’t expect them to last for long. They may repeat 2, 3, maybe 4 times and then disappear. Use them for information while you can, but don’t rely on them too heavily (see: Pay Attention to Tendency and Price Action).
I go through this checklist while I am trading to make sure my own expectations align with what the market is offering. It helps tailor my expectations to the market, and stay focused on the immediate and overall outlook. Based on your strategies, you may choose to create your own checklist which will help you determine when you should be trading, when you shouldn’t be, and when it is time to trade in the other direction.