Mapping Out the Right Approach Before the Market Opens
"Chance favors the prepared mind." — This quote, originally stated by chemist Louis Pasteur, but made famous to me in a Steven Seagal movie perfectly describes what it takes to be a trader who uses technical analysis.
While we can’t predict the outcome of the market, with proper preparation we can increase our odds of taking a winning trade, and manage our risk accordingly. One of the ways we can do this is to both prepare our charts, and also prepare the type of trader we want to be.
On any given day, a trader has many choices to make. The first choice: to not trade. The others are to play bullish or bearish, and each one of those either conservatively or aggressively. It helps determine not only direction, but the time frame to focus on as well. What does this mean when preparing a day to be conservative or aggressive?
Aggressive or Conservative?
This question helps to determine which time frame to focus on, and often dictates whether to be looking to enter a trade within the first 20 minutes of the trading day, or not.
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Aggressive Bull
- Looking to play resistance breaks (like high of the previous day) or key support.
- Scanning pre-market for relative strength vs. major indices
- If the market is starting weaker but you are looking for an hourly or daily higher low with the longer term trend, you may be looking to trade against short term momentum to scout the reversal.
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Conservative (Patient) Bull
- You are waiting for hourly, daily or weekly consolidation.
- A higher low on those time frames is the most likely scenario.
- Most often waiting for the first 30+ minutes before looking to enter.
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Aggressive Bear
- Looking to top fish at resistance, or enter on break of key support.
- Often trading the open or the first 20 minutes of the day.
- Scouting relative weakness pre-market vs. major indices.
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Conservative (Patient) Bear
- Waiting for an hourly, daily, or weekly bounce to scout the lower high entry
- A lower high on those time frames is the most likely scenario.
- Most often waiting for the first 30+ minutes to play out before looking to enter.
Further Information
- See our Guide to Time Frame Management for more information on establishing the trade game plan
- Watch our educational video on Utilizing Different Timeframes and download its associated guide
Time Frame Considerations
A conservative trader is usually looking at hourly charts or longer, preferring charts with less fakeouts and a longer time horizon to enter and exit positions. An aggressive trader is looking to shorter time frames, perhaps 15 min and under both for aggressive entries and potential scalping.
Combining Market Conditions and Personal Style
Each morning the market conditions in combination with the personal style of the trader will help to determine what kind of positioning the trader is looking for that day. An aggressive bull might focus on playing an oversold bounce in an aggressive gap down. A conservative bull might wait for the market to validate a bounce or trend change before entering a long trade.
On the bearish side of things, in a downward trending market, an aggressive bear might look for quick bearish entries anticipating further decline, perhaps using moving averages or the relative strength indicator to guide entries. A conservative bear might wait for bounces to play out, or confirmation of a downtrend on the longer charts to enter bear positions.
Daily Planning and Execution
Assessing the market conditions each morning, using multiple time frame analysis, can help a trader determine the most likely scenarios for a day, and plan several trade plans to execute if conditions are met. Assessing your own personal style of trading, aggressive or conservative, can help you narrow your focus to the best possible setups for both your style of analysis, and your style of trading.
Putting It All Together
Creating trade plans for several scenarios, deciding what type of trade best suits your setups, and then categorizing each ticker into aggressive and conservative scenarios will help your prioritize your trades for the day, keeping you organized and locked in, ready to execute when the markets permit, and ready to adapt when the conditions change.
Watch the Prep in Action
Great trades start with great prep. Here’s how Dan maps out his strategy before taking a single trade.
