Practice Like a Pro

If you want to compete with professional traders, you have to practice like one. Practice builds instinct. Great traders create a routine 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.

During my decades as a broker, trader and educator, I’ve developed and refined a routine I can rely on. Here are the steps I follow:

• Weekend preview event risk (fundamentals) for the coming week.
  • Study economic releases, supply and demand reports, Fed policy, global events, and earnings.
  • Prioritize events that will affect interest rates.
    • Movement in interest rates frequently affects currencies, which may have an impact on precious metals, equities and energy. Understanding the relationship between financial sectors is vital when creating strategy.
    • Explore current tendencies. Treasuries and equities have been moving in tandem given the high inflationary environment. The dollar tends to rally when interest rates are rising. Oil prices are sensitive to the current conflict in the Middle East and the Russia-Ukraine war. Metals have been strong as investors tend to flock to safe havens during tumultuous times.
      
      
• Determine if bulls or bears control near-term momentum.
  • 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 ae 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 the upper quadrant of the day range often leads to higher prices the next session
      • Close in the lower quadrant of the day range low often leads to lower prices the next session
        
        
• Gauge the speed of the recent move. I use average true range (ATR) to determine if a market has moved too far, too fast.
  • If overbought/oversold think containment trade (mean reversion) for a consolidation phase
    • Better for speculators and short-term strategies
    • Shorting options is best to take advantage of premium decay
  • After a period of consolidation (flag or pennant formation)
    • Day ranges below average with decreasing volume
    • Apply breakout strategy
    • Long options should pay when a breakout is imminent
      
      
• Select support/resistance areas (entry/exit)
  • 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 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.).
    
    

John Seguin
Senior Technical Analyst
Market Taker Mentoring