Most developing traders struggle with approaching the markets effectively. Without a well-defined plan, they enter each day uncertain and prone to impulsive decisions. However, by following a structured approach, traders can significantly improve their chances of success. In this article, we present an 8-step process that provides a comprehensive framework for creating profitable intra-day trade ideas. By following this systematic checklist, traders can navigate the complexities of the market with confidence and increase their likelihood of achieving favorable risk/reward outcomes.
How to put a trade idea together
Identify a Strong Catalyst:
A strong catalyst is essential for heightened volatility and favorable risk/reward trades. Look for factors such as unexpected earnings results, large contracts, FDA drug approvals, updated guidance, or new product announcements. These catalysts often trigger significant market movements and present opportunities for traders. The easiest way to identify a stock in play is with a catalyst.
Assess Liquidity:
Sufficient liquidity is crucial for smooth trade execution. As an experienced trader, you will have a sense of what constitutes adequate liquidity for your preferred trading style. Generally, stocks trading at a volume of 1 million shares or more on average are considered liquid. Be mindful of liquidity, especially during intra-day trading, to avoid slippage and execution challenges.
As an options trader, liquidity is even more important to watch out for. There are many solid trade ideas that just cannot be traded because the options do not provide adequate liquidity. As a general rule of thumb, if the spread in the options you want to trade is wider than 10%, those options should be avoided.
Analyze Investor and Trader Positioning:
Understanding how investors and traders are positioned on multiple time frames provides valuable insights. On the daily chart, evaluate where the stock is trading relative to its 52-week high and low. Additionally, assess buying and selling patterns in the weeks leading up to the catalyst event. A simple Wyckoff Cycle approach is all that is needed and can give a clear overview. This analysis helps gauge market sentiment and potential future movements.
Consider Trading Volume and Price Reactions:
Examine the trading volume and price action immediately following the catalyst event. Significant trading volume and favorable price reactions indicate increased market interest and potential continuation of the trend. Assessing these factors aids in identifying optimal entry and exit points for your trades. If it is still premarket, note the premarket high and premarket low as levels of interest.
Estimate Market Open Trading Range:
Estimating where the stock will trade when the market opens provides a foundation for planning your trade. If the stock has sufficient volume outside of the “cash session” market hours, you can gauge its likely opening price. As mentioned previously, consider the stock's pre-market trading levels and historical price ranges to establish potential support and resistance levels.
Define Support and Resistance Levels:
Based on your analysis in steps 3 and 4, define multiple support and resistance levels for the stock. These levels may not be precise numbers, but rather areas where significant buying or selling pressure is expected. All areas of support and resistance should be treated as zones. Identifying these levels helps you plan your trade and set appropriate profit targets and stop-loss orders. It’s also important to note whether or not price is trading near a recent structure. If you are new to trading and technical analysis, check out the Options Mastery Course to learn how to do proper analysis and trade profitably.
Establish a Clear Trading Plan:
Having a clear plan based on the support and resistance levels you've identified is crucial. If you have a long bias, determine the specific price action that would confirm or reject your bias. Likewise, if you have a short bias, define the price action that would validate or invalidate your bias. If you remain neutral, decide whether to trade within a narrower range or wait for evidence of a larger potential move. Part of the benefit of being in the Trader’s Thinktank is receiving our Premarket Prep notes. In the notes, we outline the trade ideas and provide our bias for the play. Join us with a 14-day trial.
Visualize Potential Stock Movements:
Visualizing how the stock may trade once the market opens is a key aspect of trade planning. By considering potential paths the stock may take, you can determine the optimal time to be aggressive or exercise caution. Take into account favorable setups and avoid trades where the stock does not present a promising opportunity. In trading, a stock’s location is very important.
Developing a trade plan involves a systematic assessment of various factors. By following a comprehensive checklist like the one provided, traders can increase their chances of identifying profitable intra-day trade ideas. Remember to adapt the checklist to your own trading style and preferences while considering the dynamic nature of the market. If you have been struggling to create a trade idea that works for you, consider joining us in the Trader’s Thinktank. Not only do we provide a list of high-probability trade ideas daily, but it puts you in proximity of professional traders.