To consistently make money in the market, you must have a solid trading routine. Unfortunately many aspiring traders jump right into placing ‘buy’ and ‘sell’ orders. Without a trading routine, their results are inconsistent at best. They often go through account blowups, boom/bust cycles, and never gain any real financial traction.
What I’m about to share with you is a process that has worked for me for well over a decade. It was simple enough for me to use before I started trading full time, back when I had my 9-5 day job. It still serves me well to this very day. While my trading has evolved over the last 10 years, these fundamental trading routine basics remain the same.
I’m going to share examples of what I currently do and why. These examples will be using Stocks (my primary field of interest) but if you’re not a stock trader, that’s okay. The core of this trading routine can be applied no matter what you’re trading! You can easily swap out stocks and replace it with Forex, Crypto, Commodities, baseball cards, whatever… Pick the asset class you like and lets get started!
No matter what it is you’re trading, your trading routine should include the following:
STEP 1: Gauge Market Direction
STEP 2: Assess Market Mood (individual trades)
STEP 3: Develop YOUR Plan
Let’s go through each of them…
STEP 1: Gauge Market Direction
When gauging the market’s direction, it’s important to look at it as one big picture. Take everything into context and don’t get caught up in the minutiae. Think of the market as the forest and the direction it’s moving as the seasons.
If you were out in nature, you can tell what season it is by looking at the forest, right? If there’s no leaves on the trees and there’s snow on the ground, you could tell it’s winter.
To take this a step further, if you ONLY looked at the forest, you wouldn’t be very well prepared for the changing seasons. The majority of the trees would be bare and you’d start to see flurries before taking action. It’d be kind of like that old fable about the squirrel and the grasshopper. The squirrel knew winter was coming and how to tell when it was on its way. It prepared during the summer and autumn. When winter finally came, the squirrel was ready and the grasshopper was left out in the cold.
We can be more like the squirrel! Here’s how…
Look at how the major indexes (S&P 500, NADSAQ, NYSE, Russell 2000, and Dow) move across time frames. Look at them on the monthly, weekly, and daily time frames and observe if they are moving up, down or sideways.
An uptrend is defined as a series of higher highs and higher lows.
A downtrend is defined as a series of lower highs and lower lows.
A sideways trend is defined as a mess! 😂 It can move quietly or erratically but makes higher highs and lower lows or lower highs and higher lows.
Look closely at the monthly charts of the indexes below.
Based on our trend definitions, I’d consider the S&P 500, NASDAQ, and Dow to be in sideways trends while the Russell 2000 and NYSE are in uptrends.
Now let’s take a look at some weekly charts…
Do you notice the subtle changes in direction here?
The S&P 500 and NASDAQ are still trending sideways below resistance (the yellow lines). The Russell 2000 and NYSE are still in uptrends. And the Dow has shifted into an uptrend!
Now lets look at some daily charts.
Do you see some major shifts here?
All of the indexes aside from the Russell 2000 are trending sideways!
When we take all 3 timeframes into account, its like looking at the forest, the trees, and the leaves! We’re able to see the changing seasons develop and are able to prepare for them.
So you may be looking at the daily charts and wondering what all of those indicators are. If you haven’t been to any of our weekly Trading Prep DEEP DIVES or are seeing this for the first time, it may seem like a lot. Trust me, it isn’t. There’s 5 altogether.
- Distribution days
- Distribution day count over the past 25 trading days
- Number of stocks making New Highs vs New Lows on the NYSE each day
- A series of moving averages (5, 10, 21, and 100emas. 50 and 200sma)
- Price and volume
You can add other indicators if you’d like. I wouldn’t go too far beyond 5 things on any one chart. It’s easy to go overboard with indicators. If you do you’ll run into problems like confirmation bias and analysis paralysis. Both of those lead to unnecessary losses and should be avoided. Keep It Simple!
In the image below I’ve labeled a few of the distribution days (upside down orange triangles), the distribution day count, and the tally of the stocks making new highs vs new lows on the NYSE.
*The charts I’ve used to make this is TradingView Pro+.
**If you’d like me to send you the codes I used to make this indicators, click here.
So what are distribution days and why are they important?
Distribution days are a down day of at least -0.2% or more that occur on heavier volume than the day immediately before it. We look for these on the major indexes because they highlight selling pressure by the big hedge funds, mutual funds, and pension funds of the world. A few distribution days here and there are perfectly normal.
However when distribution starts to pile up and you get a several of them one after the other, then it adds a level of caution to the mix.
Is winter on its way? A great question to ask when distribution starts to pile up! However, we don’t know the answer yet. Remember, everything must be taken into context! Don’t get caught up in the minutiae with this or any other indicator.
How about the number of New Highs vs New Lows? Why is that important?
Think of the major indexes not as ‘stock indexes’ but ‘indexes of stocks’. They’re each made up of large groups of stocks. If they are to trend higher and hit fresh highs, the stocks within them must hit fresh highs, right? Doesn’t it make sense then that as the number of stocks hitting fresh highs picks up, so should the trend?
I’ve seen this play out many times. It’s a great indicator to consider when figuring out what season the market is in.
The same holds true for the number of stocks making new lows. In fact, checkout the chart below. See how the number of new highs dried up and the number of new lows rapidly expanded toward the end of February? Notice how distribution days piled up one after another?? This preceded the major drop that occurred throughout March!
By now you understand some of basics of how to gauge the market’s direction. Now lets talk about assessing the market’s strength.
STEP 2: Assess Market Strength
Assessing the market’s strength is like looking underneath the hood of a car and checking the engine. Imagine you walk into a showroom and are about to buy a brand new Lamborghini! It looks amazing, has the ‘new car smell’… but what if you lifted the hood and they forgot to put the engine in? Would you still buy it?
So how do we look under the market’s hood?
I like to do it by looking at my Universe List which is a list of stocks I pay attention to that pass my criteria. You can read all about the criteria I use and how to build you own Universe List here. I’ll check my Universe List to see what stocks are setting up and assess the following:
- Number of bullish setups
- Number of bearish setups
- Quality of the setups
- Stage of the setups
- Which groups the setups are coming from
- Are stocks extended?
Setups in stocks are what fuels uptrends on the indexes. The greater the number of setups, the more fuel there is in the tank for the market to continue running. When the market is extended and setups are few, its a sign that the market needs a breather to give new setups a chance to form.
STEP 3: Develop YOUR Plan
Once you have a sense of the overall ‘mood’ of the market, and have assessed the number and quality of the setups available, you’re now in a position to start building your trading plan.
Here are a few key things to include in your plan:
- How many positions will you add and how much risk per position will you add given the current environment?
- Which trade(s) will you take if they trigger?
- Where will you enter? Where will you exit with either a profit or a loss?
- How many types of exits will you use? I use the following 4 types of exits.
- Profit Targets: Based on multiples of what I’ve risked (R). For example, if I enter at 100 and my stop loss is 95, if price goes to 110 I’ve made 2R).
- Stop Losses: Where I’ll exit with a loss
- Trailing Stops: I like to use the 5, 10, and 21emas as trailing stops. This helps me exit positions when they lose momentum.
- Back Stops: Exiting trades as they fall below price structure
*For a list of the questions I ask myself ahead of every trade I take, click here.
These 3 steps are the fundamental building blocks that allowed me to develop the trading systems and processes to not only trade part-time back when I had my 9-5 day job, but to trade well enough where I had the flexibility to quit my day job and trade full time.
I conduct this trading routine live with MARA Elite members as one of the benefits they receive.
If you’d like to fast track your success, I encourage you to checkout our MARA Elite membership program and see if it’s right for you.
Best selling author. Trader. Coach. His mission, help you succeed in the market as he has with thousands of others. He has spoken at AAII, Stocktoberfest, Benzinga’s Global Fintech Awards, and has been featured on NASDAQ Live.