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In today’s episode, you’ll discover a simple trading checklist to better time your entries (you don’t want to miss this out).
So tune in right now…
Resources
This Trading Checklist Will Take Your Trading to the Next Level
The 200 Day Moving Average Strategy Guide
The Complete Guide to Stop Loss Order
Transcript
Hey, hey, what’s up my friend? In today’s episode, I want to share with you a simple trading checklist to help you better time your entries.
1. Relative strength
Let’s say for example you trade stocks, then relative strength simply means how strong a stock is, relative to the index. Let’s say Stock ABC has risen by 50% this year, whereas the S&P 500 has only gone up 10%.
In terms of relative strength, you can see that stock ABC is stronger than the S&P 500. And in this case, you want to look for buying opportunities in stocks like Stock ABC because they have proven that they are strong in recent months.
Same thing for currencies. If you trade a basket of currencies, you want to buy the strongest currencies and sell the weakest one. If you look at currencies, one way to go about it is to use a rate of change (ROC) indicator.
You can plot out the rate of change of currency pairs let’s say over the last 15 weeks or even over the last 50 weeks, depending on the type of trader you are and how long your trades are.
Usually, I go with the last 15 weeks of ROC value, and I rank the currencies from strong to weak. Those with the highest ROC values will be ranked at the top. Those are the currencies that I want to be buying.
And those ranked at the bottom are the currencies that I want to sell. This gives me an idea or sentiment, to know which currencies are strong and weak. And I can find the ones which have a higher probability of the market moving in my favour.
If you’re trading forex, this is a tool that you can use. And again, the concept can be applied to stocks as well.
Can you find out what’s the stock ROC over the last 50 weeks and compare that against the S&P 500’s ROC value. If its ROC value is higher than the S&P 500’s ROC value, then those are the stocks that you want to focus on.
Basically, the higher the ROC value, the stronger the stock is. So that’s the first thing, relative strength. You want to be buying the strongest markets out there and selling the weakest ones.
2. The trend is your friend
Let’s say if you are looking for buying opportunities, then needless to say that you want to be buying in an uptrend. So you must ensure the market that you’re trading is let’s say, above the 200-day moving average, above this long term trend following indicator.
That’s one way to define the trend. You want to make sure that you buy in an uptrend and sell in a downtrend. That’s the second thing, looking at a trend.
3. Identify the area of value
Think about where potential buying pressure could step in. Just because a market is in an uptrend doesn’t mean you’re going to buy immediately, because the market could be going up for the 10 days in a row already.
What you’re gonna do is to let it come to an area of value which could be things like support, trendline or a moving average, where the market could potentially find buying pressure. This is what I mean by looking for an area of value.
4. Look for an entry trigger
This is what will get you into the trade and to confirm that the market is about to reverse or go in your intended direction.
It could be simple things like candlestick patterns, like a hammer, bullish engulfing pattern.
Next…
5. Set a proper stop loss
Because you can have the best entry trigger, but if your stop loss is crap, like a 5 pips stop loss or a 10 pips stop loss when you’re trading on a daily timeframe, then you’re asking for trouble.
Your stop loss must be placed at a level where it makes sense.
Let’s say you’re buying at support, then when the price comes into support and forms a hammer to bounce up higher, and you go long on the next candle. Where should you set your stop loss?
Ideally, your stop loss should go below support because that’s an area of value. You shouldn’t exit your trade until that area of value is invalidated or destroyed.
Where will the area of value get destroyed? Well, if the price breaks below support. Because it tells you that something’s amiss, the area of value is not holding up and you better get out of the trade.
Your stop loss should go below support, like for example, 1 ATR below the low of support, that’s how you should go about setting your stop loss.
Bonus tip: stacked levels
What I mean by this is let’s say you enter your trade on the 4-hour timeframe, there’s a hammer, you buy at support, and the market is in an uptrend, etc.
That is not the only thing going in your favour because on the daily timeframe you happen to realize that the area of support on the 4-hour timeframe also coincides with an upward trend line on the daily timeframe.
There are multiple areas of value coming together, on the 4-hour and daily timeframe. That makes that area much more powerful and you can expect a stronger reaction. This is what I mean by stacked levels.
It’s not possible to have every trade to have a combination of stacked levels, but when you identify those trade where multiple confluences come together, those are the trades that can move in your favour. So pay attention to those as well.
With that said, let’s do a quick recap…
Recap
- Relative strength – buy what’s strong and sell what’s weak
- Trade with the trend
- Trade from an area of value
- Look for an entry trigger to signal that the market is about to move into your intended direction
- Set proper stop loss
- Identify stack levels where multiple areas of value from different timeframes come together at a similar area – that’s where you can expect a stronger reaction in the market
With that said, I wish you good luck and good trading. I will talk to you soon.