Trading Checklist: Before Buying

Trading Checklist:

Trading Checklist:

• Check the markets and trade in the direction of the prevailing market trend.
• Check the industry. Are other stocks in the same industry moving the same way?
• Are they showing signs of topping out or bottoming?
• Which stock leads the pack? Study it for clues to future price direction.
• Check industry relative strength. Make sure the industry is top ranked.
• Look at the weekly scale (or the next higher scale) for any threatening chart patterns.
• Is the stock trending in the same direction as on the shorter time scale?
• Do you see any existing chart patterns?
• Do you see underlying support or overhead resistance?
• Draw trendlines to see where price may intersect them.
• Score the chart pattern. 
• Historical review. Find another chart pattern in the same stock and see how it performed in the past.
• Check your favorite indicators. What are they telling you?
• Relative strength index (RSI): I use this for divergence and as an indicator of overbought (too pricey) or oversold (too cheap).
• Bollinger bands: When the bands narrow (low volatility) that tells me price is going to make a big move. Price often bounces from one band to the other, especially when the band is horizontal and price touches it.
• Is the stock price diverging from the indicator?
• Is the indicator signaling a trade?
• Check for failure swings, little M or W shaped patterns that may signal a short-term reversal.
• Review the industry relative strength. How is this industry doing compared to others? You'll find that industries performing well will continue to do well, usually for months.

• Is the stock trending up? Why buy a stock today when it will be cheaper tomorrow? Wait for price to turn up before buying. View the stock on the weekly scale (or higher time scale) to help decide the trend.
• Is the stock trading near the yearly high? Buy stocks showing chart patterns near the yearly high, preferably breaking out to a new high. When the breakout occurs, price coasts higher on momentum, so you can raise your stop. You do use stops, don't you?
• Get a quote before trading. Delay buying if the quote is lower than the last time you checked.
• If the stock is up too much intraday, skip the trade. Don't chase a stock higher.
• Look for overhead resistance. Where is price likely to stall or reverse?
• Look for underlying support. How far down is the stock likely to go?
• Place that stop with your broker.
• Will a throwback or pullback happen? Prices return to the breakout price usually in about a week. Consider initiating or adding to your position once price resumes the original breakout direction. Statistics show that chart patterns with throwbacks or pullbacks perform worse than those without throwbacks or pullback, so keep that in mind.
• Check for DCBs. Avoid any stock showing a dead-cat bounce within the last six months. Why? Because one dead-cat bounce tends to follow another.
• Prices don't trend forever. If you are about to buy a stock that has been trending upward for several days in a row, count on price reversing just after you buy. The same goes for a consecutive declining price series. Wait for the turn then trade.