This is a checklist of things you should consider before entering a position. I took it from the book “Technical Analysis of the Financial Markets: A Comprehensive Guide to Trading Methods and Applications”, by John J. Murphy, which I highly recommend for anyone interested in getting to know Technical Analysis in depth, but you can learn a lot just by googling the items.
- What is the direction of the overall market?
- What is the direction of the various market sectors?
- What are the weekly and monthly charts showing?
- Are the major, intermediate, and minor trends up, down, or sideways?
- Where are the important support and resistance levels?
- Where are the important trendlines or channels?
- Are volume and open interest confirming the price action?
- Where are the 33%, 50%, and 66% retracements?
- Are there any price gaps and what type are they?
- Are there any major reversal patterns visible?
- Are there any continuation patterns visible?
- What are the price objectives from those patterns?
- Which way are the moving averages pointing?
- Are the oscillators overbought or oversold?
- Are any divergences apparent on the oscillators?
- Are contrary opinion numbers showing any extremes?
- What is the Elliot Wave pattern showing?
- Are there any obvious 3 or 5 wave patterns?
- What about Fibonacci retracements or projections?
- Are there any cycle tops or bottoms due?
- Is the market showing right or left translation?
- Which way is the computer trend moving: up, down, or sideways?
- What are the point and figure charts or candlesticks showing?
After you’ve arrived at a bullish or bearish conclusion, ask yourself the following questions.
- Which way will this market trend over the next several months?
- Am I going to buy or sell this market?
- How many units will I trade?
- How much am I prepared to risk if I’m wrong?
- What is my profit objective?
- Where will I enter the market?
- What type of order will I use?
- Where will I place my protective stop?
Going through the checklist won’t guarantee the right conclusions. It’s only meant to help you ask the right questions. Asking the right questions is the surest way of finding the right answers. The keys to successful trading are knowledge, discipline, and patience. Assuming that you have the knowledge, the best way to achieve discipline and patience is doing your homework and having a plan of action. The final step is putting that plan of action to work. Even that won’t guarantee success, but it will greatly increase the odds of winning in the financial markets.