A good routine to help you stay disciplined in the market is crucial for trading success. It has taken me years to come to that conclusion and then some more to develop a routine that fits my unique trading characteristics.In this article, I want to share such a routine with you. Hoping it will both inspire you and help improve your trading. At the very least use it as a starting point when developing your own routine.
As the title of the article states, this is only my pre-market trading routine hence it is best performed before you start your trading day.
With this routine, I aim to take a level-headed look at the trading day ahead, put my priorities in place, and set a plan for the day without being led by emotions.
The routine
The note to self
I start my day with a short note to myself. You can fill in a motivational quote for the day here or tell your “future-self” a short message or just note down what you expect from the day or what kind of person you want to be. I find doing this to help me keep my inspirational meltdowns at bay and helps me keep my focus during the day.
The checklist
The following is the pre-market checklist. This list is made to prompt you to think about essential things in the markets before you start trading. Familiarize yourself with the market sentiment of the day, check what news/earnings/SEC filings, etc. are released today, make sure your trading systems are running smoothly, etc.
- Market sentiment today? Bullish Bearish
- Review key economic reports for today;
- Review today’s news/earnings related to open positions;
- Make a watchlist for today;
- Make sure all your trading systems are ready for the day.
The watchlist
Next is a list of the top 5 trade candidates for the day. It is unnecessary to fill in all five if you are trading less, but it is good to limit yourself to five in most cases as that will help you make fewer but better trades.
Even for short-term scalpers, it is still a good rule of thumb to use the 5-asset limit. This is due to our limited capacity to focus on multiple things at the same time.
The working memory is estimated only to be able to focus on 3 to 5 things at a given time. That’s why having more than five stocks on your daily watchlist may be risky.
While an algorithmic trading system can manage trading hundreds of stocks at once, we are limited to how much brain-power we can dedicate at once to multiple things. As the number of instruments we monitor increases, our work quality starts suffering. You may start making worse decisions or miss crucial information if you focus on too many assets at once.
That’s why it is good to review your trading universe and pick only the most potential tickers to trade before markets open.
The questionnaire
Following, I answer the pre-market questionnaire. This questionnaire is designed to help put you in the right mindset for the trading day. To protect your capital against loss and move your attention to planning ahead and preventing the worst-case scenarios from fulfilling.
While all of this may sound very negative oriented, game theory suggests that the point of trading is to stay in the game long enough to let our strategy make money.
Having this in mind and being aware of the human nature of holding onto losses, I designed this questionnaire to try and prevent your emotion from taking over in times of crucial decision-making.
I also have made a video on this same topic where I go a little bit deeper into the reasoning behind these questions. So if you want to go deeper too, or just are tired of reading I invite you to watch this video.
1. How will I deal with economic events or news that could impact my open positions today?
This question is meant to draw your attention to your current open positions. To make sure that no volatile events are anticipated today, and if there are any — to put a plan in action for how you will manage your positions around those events.
You may consider closing your positions before the event, leveraging down, hedging, or maybe even trying to take advantage of the anticipated volatility at this point.
2. How will I limit my risk to avoid loss today?
Here you may consider your future as well as your current positions. Think about how you will prevent new positions from introducing unnecessary losses as well as your open positions from generating a loss. This includes not losing your floating profit too.
Consider things such as trading less, hedging positions, locking in profits, stop-loss orders, even hidden stop-loss orders if stop collecting is something you worry about in your strategy.
Don’t forget your portfolio and broader view of your system, maybe there is a way to prevent a losing day by cleverly restructuring your portfolio?
3. What’s the worst that could happen today, and how will my best-self prevent it?
The goal here is to anticipate a critical scenario and put a plan in place for solving it before it happens, while you can plan without being influenced by emotion and rush. Sometimes unexpected opening gaps, unprotected positions, or margin calls can ruin a trading day.
Think about your exposure and think about things outside of your control, such as the internet going down in the middle of a trade and such.
The key word in this question is best-self. This means how would the most efficient version of you deal with the situation, a version of you that is entirely rational and logical.
Thinking about worst-case scenarios may not be the most exciting thing to start your trading day with, but it will help prevent you from going overboard when unforeseen drastic things happen in the market and outside of it.
4. One thing I can do to be a better trader today:
The purpose of this question is to look back on your trading and think about what you have done in the past that you could improve today. If nothing comes to mind, maybe there is something new you want to try to improve your trading performance today.
5. My HARD RULES of the day
This question is your “kill switch” rules for trading. It is always good to have a plan to set in action when things start getting away from you. Some traders might only accept a certain amount of loss per day, after which they would cease trading for the day/week/month. Think about how to prevent yourself from hurting your trading account and write it down.
That’s it folks
There you have it. This is my simple pre-market routine that is universal enough for various trading approaches I take, yet covers most of the worrisome aspects of trading to help me start the day on the right track.
I sure hope this gives you a more structured way to approach the markets in the morning or at the very least inspires you to create a routine of your own.