In addition to actually firing the trade, you need to check you have the right context overlay as you enter a trade. It may be enough to simply check and see the data (price, order-book/volume flows, time of data) but you will want to also have a map for the day. This document attempts to outline a checklist for preparation to choose and trade a market.
In-Play Market?
Before you do anything else, you need to check the market you want to trade is in play.
- Is there volatility? A catalyst?
- The first check is just to see if the market is likely to move enough. Having a proximal catalyst such as economic data or another news event is a sure-fire way to check.
- Checking the volatility index also helps here, as volatility _tends to_ drop after spiking, and traders play this so it is self re-enforcing.
- Is there another catalyst coming up?
- As an example, if you’re trading S&P – if you had a manufacturing index print in the AM, and you expect CPI tomorrow AM, you should know that these catalysts are on the roadmap and be checking that the market is responding the way you expect. If today’s data should have sold, but the wick was bought, you know that funds are probably betting on tomorrow’s data being bullish and so you should be taking notice of this and be adjusting.
- Has a catalyst caused rotation?
- If you check heat maps for indices, you may notice that funds are rotating eg out of tech or mega-caps. If funds are rotating out of mega-caps into a megacap earnings report, that mix should be front of mind.
- Is there correlation between assets or randomness?
- As markets become more uncertain, correlations appear to weaken. Looking at something like the CBOE 30 day Correlation Index will shows how tied together components of the S&P are to each other (or not.) Indices become scrambled garbage the more the correlations drop.
Direction Confluence
- Check a variety of timeframes and concepts for directionality confluence:
- High timeframe and low timeframe showing same direction?
- Intraday seasonality supportive?
- Time of day supportive?
Ideally all of these line up and point the same direction. If they do, trade it hard. If they don’t be careful.
How Important is Data Collection and Checklist?
This is a snippet from a conversation on the discord:
k-xs 
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