Homework 101

Many young traders already know that doing their trading "homework" is an important process.  It can play an integral role in shortening a beginner's learning curve and it can be a key factor in a professional being able to maintain his or her edge in the markets.  Lots of educators talk about the importance of doing homework, but rarely have I seen them give a detailed guide with which to do this.  So, I've decided to do a multi-part guide dedicated to homework.  This guide will include how I, personally, recommend doing homework from a Balancetrader perspective.  There are many derivations to this and it will be different depending on an individual's personal preferences, but I think me showing my way of doing this might shed some light for those who want to do this but don't know where to start.

This installment will be an introduction.  I think the best way to start this is to give a general outline explaining exactly what homework is, how to do it, and what to use it for.  Once we have a good idea as to what we're trying to accomplish, we can then dive into more intricate details.

What exactly is homework?

Homework is a day trader's preparation to the trading day.  I like to think about it from an athlete's perspective.  Before a big football game, for example, a team will go over many hours of tape in order to prepare themselves for the coming game.  Every player needs to understand the particular strategy changes the coaching staff is implementing for the team their playing and what their roles are regarding that strategy.  A team that doesn't prepare adequately can get run over without this preparation, even if they are a superior team.

Well, trading is no different.  There are many traders who can just stroll in at the opening bell without doing any prep work.  Chances are, it's probably a professional who's been doing this a long time.  To be honest, I've been implementing Balancetrader so long that my homework consists of very little preparation.  It's not that I don't need it any more.  It's just that I've done this so many times over and over again, that I can do it in my sleep.  This, however, is only because I've seen so many different scenarios so many times over and over that I can literally look at the market rather quickly and digest it all without going through this whole process.  If you're a beginner or even an intermediate trader that does not do this exercise, I highly recommend making it a habit.  If and when your trading improves to the point where you become highly consistent and profitable, you can start to think about shortening your homework process.

Do I have to write my homework out?

I recommend structuring the homework in a written format.  Why?  Because this makes a fantastic log that you can look back on in the future.  You can do everything in your mind, but taking the time to write it down allows you to look at what your prepared strategy was for the day and allows you to assess whether or not you followed your plan or not when the day is over.  This, coupled with a trading journal (we'll discuss this in a moment), is a very powerful personal exercise with which you can use to improve your trading.  As we get more into this guide as time goes on, you should start to see why.

What should be in my homework?

Now this is what is important.  Here is what I think should be in the homework of any individual that uses a profile to do their market analysis:

Now let's talk about each of these a bit more to explain them.

Daily Trade Journal Entry

This really is the most important thing an aspiring student should be doing.  You hear every guru tell you that you should do this and I'm pretty sure most of you don't.  I could probably spend numerous entires just on the journal alone, so I will save this topic for another blog segment.  The importance of including this journal in your nightly market homework is quite high because the journal is how you keep tabs on what you're doing during the day.  You can see how you executed trades based on your homework.  Your homework is your strategy for the day and having a journal entry allows you to bring a certain level of accountability to the process.  The journal can easily show your mental breakdowns and breaks in discipline as well as reinforce good habits when you do things properly.

Support & Resistance Profile Levels

As I've said before, this is where it all starts for me.  Without this, I'm blind.  I believe mapping out your support and resistance levels pre-market is so important.  I've already done a detailed video tutorial on how I do my profiles levels.  If you've missed that segment, please dig through the Balancetrader Outlook archives and go through it.  I spent a few weeks doing this process every day so there would be a good tutorial on how to do this.  If you learn one thing from all of this, this is what you want to take home with you.  It's the best, free information you'll ever get.  I promise.

Daily Bar Chart With Volume

There are times when the larger time frame pattern is so obvious by looking at this chart that you'll wonder how you avoided it all this time.  My main concern when looking at this chart is to get an idea regarding how the market is currently conducting its business.  The first thing I'm looking at are possible areas of balance and larger levels on the daily chart and note them down.  Most importantly, I'm looking to get a grasp of how the market is conducting the auction process and the type of volume accompanying it.  Are we moving in the current direction on increasing or decreasing volume?  What is volume looking like as we test a large level?  This sounds so obvious but you really will be surprised some times how the market will be screaming something to you and if you didn't look at this chart you wouldn't see it.

Expected News Announcements

Now, if you know me, you know that I'm the biggest ignorer of news in the trading business there is.  I can't stand news.  I refuse to pay attention to it.  I don't avoid trading around news like most gurus tell you.  In fact, I welcome news.  News drives the market participants' perception of value, which drives the nice moves we want to be on board for.  Without news, the market goes nowhere.  More often than not, news is the catalyst that gets things moving.  You don't want to be afraid of news.  You want to embrace it.  You don't want to exit a position because news is due out.  You want to hold the position to see if the news will propel the market in the desired direction.  This may seem completely backward compared to all those other gurus out there so I'm going to ask you to trust me on this one.  If you take the time to look at the data, you'll see that trading with news will skew your risk / reward ratio more in your favor.  The important thing to remember, however, is that we aren't going to interpret the news.  That's pure suicide.  We all know that the market will sometimes process good news and go down and other times there will be bad news, yet it goes up.  We'll let market structure and the auction process dictate the bias.  What's important is knowing that news will be coming out and when it's coming out.  It's not our business to interpret it.  If we're not at least aware of it, however, then we're going to get caught off guard and we don't want any surprises.

Current, Relevant Events

This section is more speculation than anything else.  What's going on with the economy?  What is driving the market?  Maybe interest rates are the big thing right now.  Other times it might be the price of crude oil.  The market is a very fickle thing.  One minute it cares about a happening in the Middle East and the next thing you know the market is more concerned with home sales.  This isn't the most important part of your homework, but thinking about these things and documenting them will bring you closer to the market, especially when you're more of a novice.  It will help you to better grasp the drivers in the market and get a better feel for how it does its business.

Scenarios

This is where it all comes together.  You take all the above information, process it, and detail the possible scenarios the market may throw at you.  I believe that using a profile provides the unique ability to do this that no other methodology can provide.  We want to try to come up with every possible scenario we can think of for tomorrow.  Where can the market open, where can it go after it opens there, what trade setups can form in that scenario.  If this does happen, how do you want to handle it?  Will you trade it?  How will you execute the trade?  How will you manage the trade?  We'll do this process for every scenario we can think of.  Don't worry.  It's not THAT bad.  There isn't as many scenarios as you may think.  The importance here is to try to not get caught off guard here (note the key word is TRY).  So often you will see the market unfold one of your scenarios and because you've documented it in a detailed fashion, you remove the prospect of making spur of the moment decisions.  In that situation, all you have to do is execute the plan you came up with when you went through the scenario.  Then, when you do your journal, you can immediately either slap yourself for being an idiot, or pat yourself on the back for executing as planned.  This is that level of accountability I was talking about previously.  If you can't fix your discipline issues like this, you probably can't do it at all.  Now, there is no way we can foresee every single scenario that is going to unfold every time.  That's just not possible.  We can, however, hit the nail on the head quite often.  And when we do, the preparation pays off.  If we miss the spot, then so be it.  Tomorrow is a new day.

Conclusion

Hopefully, you can see the importance that homework has in the trading process.  It does require some work unfortunately.  The way I see it, there are always people out there who are taking things to the extreme and if you don't take it further than them, you're going to get squashed.  Despite what people may say about trading being more of a personal fight, I think that a big portion of it is a war against the other traders.  I mean, if you lose money then some other trader took your money.  It's that simple.  So doesn't it make sense that being better prepared than the other trades will give you an edge?  Some people may argue this with me and I would be more than happy to have that debate.  Even if it were not true, doing homework in this fashion is going to help you dramatically in helping you fix your psychological issues.  Doing homework is really a win-win situation.

In the next entry, we will go over how I like to look at the daily bar chart with volume and as time goes on we will hit upon all these points in more detail.  After a few weeks, hopefully we'll have finished a great guide you can use to get yourself doing some very serious and powerful homework.

See ya next time!

Frank Butera
Balancetrader.com

(this article was originally posted on the Balancetrader blog located at http://www.balancetrader.com/bt-outlook)