Planning ahead for the trading week is a very important, yet often overlooked trading task. Many traders guess if the conditions are suitable for trading instead of using objective rules. Professional traders of futures, forex, and stocks know better.
Here are several ways to prepare:
1. Know the upcoming news events for the day and the week. Look at our news calendar or Bloomberg’s site for high priority events. These events, usually marked with a red color, can cause significant volatility. Most of the time, it’s best to wait for the volatility to subside. Also look for Fed Chair or Janet Yellen listings. Even if marked medium or lower priority, the Fed Chair can move the market with her announcements.
Important times for news events:
2. Markets move in cycles. Compare today’s price action to recent days. Is it similar? Often times, it is. That’s because cycles are usually three to six days in duration. If you’ve seen slowness, expect slowness. If there’s been volatility, expect volatility. The last four days provide a picture of what to expect. The ATR (Average True Trange) can help determine volatility. Also, switch to a daily chart. You may see groups of three to four candles stuck in a range.
3. If there’s an upcoming Monday holiday and the market will be closed, expect Friday’s activity to be slow. Three day weekends can produce “stair step” price action, which is best avoided. Mornings are the best, but Friday afternoons before a Monday holiday are often slow. A few exceptions to this rule are Christmas, New Year’s, Thanksgiving, and Easter, where you can have decent volatility.
4. International news events push and pull the markets. Take a look at Brexit. Brokers increased margins to account for the volatility. War, economic calamities, terrorist acts, and natural disasters often trigger unpredictable movement. If there’s big news in the UK, expect a ripple effect in the U.S. markets. Such ripples can be felt for weeks, as we’ve experienced with Brexit.
5. When the market approaches or exceeds new highs or lows, expect volatility. That almost goes without saying because volatility is often what gets the market to these new extremes to begin with. However, once they are surpassed, you could be facing a reversal or consecutive retracements until the market “decides” where it wants to be. Pull up a daily chart and note the recent all-time highs and lows. Markets love to trade where they’ve been before. If things get too volatile, it’s best to stay out and wait for another setup to occur.