Preparing for your trading day is a must for the serious trader. If you know what to expect for the day ahead, you can make much better trading decisions, avoid surprises and you are less likely to miss trades. The following 8 points will give you a head-start and allow you to approach your trading from a completely new perspective. We will also go over why each point is so critical:
#1 Higher time-frame analysis
A short glimpse at the weekly or daily time-frame is a must before you start your trading day. It helps put everything into perspective; you can get a feeling for where you are in the overall trend and you see immediately if any important obstacles or price levels are coming up.
#2 Support and Resistance
In addition to marking important price levels from the higher time-frames, knowing where to expect intra-day support and resistance is important too. Even if you are not using support and resistance in your actual trading system, it is a very commonly used trading concept and millions of traders watch support and resistance levels. Knowing where other traders will get interested in the market is key.
#3 Highs and lows
Especially weekly and previous day’s highs and lows are a must on your charts. Highs and lows are used by breakout, range-trading and reversal traders and you can often see a good reaction on highs and lows because it is such a commonly used concept.
#4 Moving averages
It pays off to know where price stands in relation to the most famous moving averages. The 50, 100 and 200 moving averages are even picked up by the financial media from time to time when price approaches such levels.
Furthermore, knowing if price moves above or below a certain moving average can tell a lot about the current market state. Even the “market wizard” Marty Schwartz named moving averages one of his most favorite trading tools and he uses them as a directional filter.
#5 Volatility and trend-phase
Knowing if you are in a high or low volatility market environment is essential because it also tells you how to set your orders. Whereas you have to apply more conservative order placement in low volatility times, you should set orders further away when volatility is high. The ATR indicator is a good indicator when it comes to analyzing individual market volatility.
Especially Bollinger Bands are a great trading tool because they provide a variety of different information. Widening or shrinking Bollinger Bands tell you if volatility is high or low; and price position relative to the Bollinger Bands tells you a lot about the trend-phase. If price has been moving outside the Bollinger Bands for some time, the trend is strong and a short-lived price spike through the Bands can signal an upcoming reversal.
Volume tells you a lot about the current market state. You have to ask yourself the following two questions when looking at current volume and price action:
- Is price rising on high or low volume? Rising prices and rising volume can signal accumulation
- Volume above the average is called heavy accumulation (or distribution in the case of a sell-off)
You don’t have to get too lost in the volume analysis and understanding whether volume is support or going against current market direction is sufficient for your market preparation. Applying a moving average on your volume can help you identify high and low volume market environments.
#7 News for the day
Each morning, take a look at the economic calendar for the day. Important upcoming news typically slow down the market prior to the news announcement. Avoiding trades in pre-news market environments is often a good choice. When volume is low during such periods, markets can often get erratic and it is common to see short-lived price spikes.
#8 Your last 5 trades
This is among the most important points to get yourself into the right mindset before you start your trading day. Knowing if you are currently in a losing or winning streak can help you avoid risk management mistakes; increasing risk during losing streaks, being too scared after few losses and getting reckless and too confident after a number of wins rank very high on the most commonly made trading mistakes.
Always take a brief look at your trade log to get a feeling for your past performance.
In most high-performance activities, the top participants work with a checklist. A checklist not only holds you accountable, but it also makes you more aware of your overall approach. It also takes out the guesswork and provides a framework which will help you establish a better and more professional trading routine.
There is a substantial risk of loss in futures trading. Past performance is not indicative of future results.