FINANCIAL FOCUS
Before You Trade
In this installation of Financial Focus, we will discuss the topic of pre-trade preparation. As always, we will provide some education and commentary for the inexperienced and/or uninformed.
In Chapter 1 of our publication When to Buy and When to Sell: Combining Easy Indicators, Charts, and Financial Astrology (available on Amazon), we discuss concepts including Human Emotion, Risk Management, and Education.
In addition to these basic concepts, there are several preparation tactics one should employ prior to the physical act of trading, as they are different than longer-term investing…
After-market and Pre-market news/earnings – A trader should be aware of any developments that can move the markets, both after the close on any given day the market is open, as well as before the open on the following trading day. A multitude of news events and earnings announcements can shift market sentiment, even for a short time, effecting entry/exit points, support/resistance levels, and potential reversal points.
The Fear & Greed Index – This gauge, highlighted in our publication and weekly blogs on this site, measures the emotional sentiment of all traders and investors, based on a seven-factor formula. The 0-100 levels are separated into 5 categories, ranging from Extreme Fear to Extreme Greed. When reaching extremes, there is a high probability of market reversal within a short time frame. Swing-traders and long-term investors can benefit from this index without engaging in the day-to-day fluctuations of equities.
Catalysts – any sector or stock moving 1% or more, in either direction, that has not yet been factored into the market. Please see our Did You Know – About the Catalyst blog, dated 1-24-26, for more information.
Index price levels – After each day in the equities markets, there are popular price levels for price acceptance, pivots, reversals, and heavy volume, that appear on a chart. These levels can shift, even very slightly, which sets up proper areas from which to trade. “Point of Control” is an indicator that can help identify these levels, which are popular points where institutions buy and sell.
Hi’s and low’s stats and Sector Analysis – Each morning a review of the number of highs and lows should be reviewed, relating to stocks and sectors. Many sites are available for this free research, and one good example is Stock Fetcher. 1-month statistics are very useful for short-term traders, as it reflects how many stocks are hitting new 20-day highs and lows. This can serve as a leading indicator, as stocks often retreat when the number reaches 500 or more, and tend to rally when 100 or less, within a short time frame.
Create watch list – After conducting due diligence, it is suggested that a “watch list” of potential stocks to trade is created for the session. Clear trends, leading stocks in leading sectors, heavy volume from the past 1-2 days, and identifiable patterns should all be considered.
Technical analysis – Once the watch list is created, each stock/index’ technical chart should be reviewed, including Moving Averages (MAs), Volume Indicators (including the VWAPs), and Pattern recognition to further confirm the research. Setting new Support and Resistance levels is also suggested, as is closing any position that has earnings after-the-close of the session, unless using advanced option spreads. The Put to Call Ratio, which provides the current bias to Puts (bearish) or Calls (bullish) in the options markets is another excellent reversal gauge. Should this ratio move above 1.0, it suggests Put buying is exhausted, and a market rally is near. The opposite is true as well, as a move under 0.75 generally signifies exhausted Call buying, and a subsequent dip in the market. This gauge is better used for short-term swing and day-traders, as it moves very quickly.
Watch first ½ hour – On most trading days it is wise to consider only liquidating strong winning positions in the first half hour. The market generally possesses the highest volume, and volatile price action, between 9:30 – 10:00 a.m. Equities tend to cool off, or at least reveal whether a trend is developing or price action will be choppy.
Internals – There are additional indicators utilized by professional traders primarily during intraday trading, some of which are discussed in our publication and previous blogs. Specifically, the Advanced/Decline, an indicator that reveals the number of stocks gaining vs losing since the prior session, the VIX, the main often-discussed volatility indicator, the TICK, an indicator of the strength of a price move, and the Point of Control, essentially a built-in accumulation and distribution level display. Any one of these instruments can be useful for a trader/investor.
Risk Management – Always remember to have a plan BEFORE the trade, as it will guide you through profit targets, mental stop losses, and your risk-to-reward parameters.
For additional discussions and education, please continue to visit us here on ASTRO-FIN.com, where we provide periodic updates on a variety of topics.
***As always, this information is not intended to be financial advice, or any specific buy or sell recommendation, but rather a guide to assist the reader in some further understanding of current economic conditions.
