Always Plan For Trading Success...The Night Before

In trading, our prime objective is to make money. And let’s face it, money is the ultimate motivator. Therefore, trading attracts some of the brightest minds in the world. When you place a trade, you are competing with these individuals. Considering this, I know that I have to be prepared. It’s a lot of hard work, but well worth the effort. I will now show you exactly what I do each night in order to prepare for the next trading day. I’m not saying that this is the only way to prepare, but this is what works for me.

Analyze Small Database

I have a small database (at least it used to be small) of stocks that I download right after the market closes. The database contains many hot new issues, popular stocks like the Lucents, Microsofts, Intels, Dells, etc., some cyclicals and a broad spectrum of technology. Admittedly, the database has gotten quite large (over 700 stocks) and is due for a culling. The database was built over the past few years by watching momentum names, new highs/lows list, new issues etc. The momentum lists (i.e., the Proprietary Momentum List on TradingMarkets.com) are a good place to find names for this database. The charting software I use allows me to flip through all of the charts fairly rapidly (with a click of the mouse). On average, I spend about 2-3 seconds on each chart. Even though I have software that will scan for just about any pattern imaginable, I still think it’s invaluable to flip through these charts. I look for cup-and-handles, pullbacks, breakouts and classical technical analysis patterns such as double tops/bottoms, head-and-shoulders, flags, pennants, etc. I notice what stocks are hot and which ones are not.

On those that are making large moves, I ask myself, could I have predicted this through classical charting? Is there a potential new pattern here? Also, from this exercise I begin to pick up "themes" in the market. For instance, in the past I’ve noticed themes such as "old tech" (i.e., IBM, HWP, etc.) performing poorly with "new tech" doing well. I also tend to notice whether the majority of stocks are trending up, down, or consolidating. This process often uncovers "hidden" aspects of the market such as "pockets" of strength in sectors even though the overall sector may be down for the day. I take notes and write down any stocks that may be worth a second look. Usually, I end up with a laundry list of about 20-30 stocks that are worth a second look. The entire process takes about 40 to 50 minutes.

Listening To The Database

I then download a database of about 4,000 liquid issues. While this is downloading, I spend about 10-15 minutes analyzing my laundry list of stocks, occasionally discussing my findings with other traders.¹ I then launch scanning software on the large database to look for patterns I may have missed. While this is running, I print off all securities from the TradingMarkets.com Stock Indicator Lists. I punch each and every one up and look at it very briefly, again paying attention to themes and sectors. For instance, I notice how many of the 15 stocks on the Proprietary Momentum List are in a particular sector and how many are on the New 60-day Highs on Double Volume List? This type of information is TradingMarkets.com's database "talking" and it often pays to listen!

Sector Analysis

I then look at the hottest and weakest sectors. Here I look to see what’s trending and what’s not. Also, I look for any patterns that might be occurring in the sector such as big-picture cup and handles, breakouts, etc. If the sector shows some sort of big-picture pattern, then stocks in the sector will likely be good candidates to trade. At least once a week (usually on Friday night), I look at all sector charts tracked by TradingMarkets.com (i.e., BTK, XAU, SOX, OSX, etc.). Here I look at both the daily and weekly patterns. From this I determine the strongest/weakest sector for the week. Based on the weekly charts, I then determine if the daily strength/weakness is significant on a longer-term, bigger-picture weekly basis. For instance, a sector may perform poorly for the week but this may just be a pullback in a longer-term, strong uptrend.

By studying the strongest and weakest sectors, I get a feel for what stocks to focus on the following day. Notice here that biotechs were weak on a short-term basis but remain in a strong uptrend. Further, on this day the group recovered (b) after selling off (a). This suggested to me that they were poised to resume their rally.

Overall Market Analysis

I keep a database of about 15 market stats and indices. These include the popular cash indices (i.e., the Dow, the Nasdaq, the Nasdaq 100, the OEX and S&P) and statistics such as the VIX, Advances/Declines, TRIN, Bond Yields etc. I analyze these indices/statistics to try to get a feel for what the overall market may do on the following day. I notice if the market is overbought/oversold based on the McClellan Oscillator, 3-day moving average of the TRIN and the CHADTP. Also, I have several market-timing systems that I either track or trade. These include the CVR systems (1 though 6). This gives me a feel for the overall market bias. Most of these indicators are displayed on the Market Bias Page. This normally takes 10-15 minutes.

In analyzing market statistics, I get a feel for what to expect in the overall markets. For instance, on Jan. 5, I noticed that the three-day moving average of the NYSE TRIN was at its highest level since the October 1999 bottom. This suggested to me that we were near the end of the corrective move and that it may be time to consider going long (buying) stocks.

Study Futures Markets

I then download about 30 active futures contracts and flip through the charts. For my stock market analysis, I pay close attention to the indices (Nasdaq 100, S&P and Dow Jones futures) and the bond market. I then print off and flip through all of the Futures Indicator List from TradingMarkets.com. I look at all the charts from these lists to see if there are patterns I may have missed. I look for pullbacks, breakouts, failed breakouts, volatility plays, etc. The above process takes about 20-25 minutes. Even if you don’t trade futures, it pays to understand what’s going on here (i.e., patterns in the index futures, rising/falling commodity prices, bond market, dollar, etc.) as markets are interrelated.

Fini

Finally, I flip through the reports generated by the stock-scanning software to see if there are any markets I may have missed. Also, I check the after-hours Globex S&P Futures market, bond market and check for any late-breaking news. After all is done, I probably have flipped through about 1,000 or so charts and several hours have gone by.

If all of the above looks like a lot of time and work, it is. However, for me, it’s my passion and obsession. It’s like being on a treasure hunt -- searching for the next market that will make a large move. After all, do you really think the top traders in the world get by without doing their homework?