Brett Steenbarger is an excellent traders coach. He writes a blog where he shares his trading ideas. This post consists of a selection of his trading suggestions relevant to day trading. Given at the end of the post are the links from which this selection is derived.
Preparation for the Trading Day
The trader’s daily preparation begins before markets open. By observing how markets trade overnight, evaluating the behavior of correlated asset classes prior to the open, and by assimilating economic data, news, and earnings releases (and market responses to these), the trader gains a feel for the market day before the opening bell rings.
Key to the trader’s reasoning is an elaboration of “what-if”scenarios that review hypotheses regarding likely market action. What if we open with low volume, near the previous day’s pivot level on a day with no scheduled economic releases? What if we open weak in the S&P 500 Index, but see firmness among the small cap stocks and a mixed open among the major stock sectors? What if the market breaks above a key price level, with bullish behavior in bonds, the dollar, commodities, and the more speculative stock sectors? What if the market breaks below support, but breadth remains mixed?
Each of these scenarios calls for a specific trader response. Each offers potential trading opportunity. By mentally reviewing the scenarios in advance, the trader becomes more prepared to act upon them. The trader also becomes more sensitive to their unfolding, so that trading opportunities can be properly anticipated and mapped out.
Three Questions for the start of the trading day
Here are three questions to ask at the start of the trading day:
1) Am I bringing baggage to the day’s trade? Am I carrying over frustrations from losing money or missing opportunity? Am I feeling particular pressure to make winning trades? Am I locked into a view of markets because those views haven’t been paying me?
2) Am I prepared? Have I identified significant price levels for the day? Have I gained a feel for how various markets have been trading overnight? Do I know if economic reports are scheduled for the day and what the expectations are?
3) What am I working on? Do I have goals for the day? What have been the mistakes I’ve been making that need to be corrected? What improvements have I made that I want to cement? What kinds of trades have been working best for me, and am I prepared to actively look for those.
Trading by Themes
One of the most important calls an active trader can make is the dominant theme of the day’s trade. Sometimes a news or earnings report will set the theme of the day. Other times, we will see themes carry over from trade in Asia and/or Europe. I find that tracking the market before the open provides a feel for some of the themes that may move markets–or shift on us–during the trading session.
Importance of the Opening Price
A trending market will stay above or below the opening price for the majority of the session, as we reject that early estimate and probe value higher or lower. A range market will tend to accept the early estimate of value, and we will oscillate around the open for much of the session.
Knowing how we’re trading relative to the open–but also seeing how individual stocks and sectors are trading relative to their opening prices–is useful in gauging evolving market strength and weakness.
Three Questions for the End of the Trading Day
1) Did I trade well today? – Did I make good use of my preparation? Did I follow rules about position sizing and execution? Did I adapt well to shifts during the trading day? Was I patient in finding trades with good risk/reward characteristics?
2) What did I learn about myself today? – What about today’s trading can I bring to the next day to make myself better? How can I learn from what I did right and wrong today? What goals can I set for tomorrow to make sure that I carry over that learning?
3) What did I learn about markets today? – Did markets do what I expected? Are my views on markets any different based on today’s trade? What levels did I observe in today’s trade that can inform decision making tomorrow? What themes from today will I be tracking tomorrow?