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15 Steps to Get Ready for the Swing-Trading Day

Alan Farley
03/06/08 - 01:19 PM EST

Your daily routine in the pre-market hours sets the stage for the rest of the trading day. Gathering usable information, picking fights carefully, and making the right moves while your competition is still in dreamland can mean the difference between a very profitable session and a losing nightmare. The most interesting pre-market activities take place ahead of big economic releases, such as Friday's monthly labor report. They also occur after notable trend or reversal days, where price surges into the close. Many traders get trapped in these events, and then try to extricate themselves before the next morning's opening bell. Traders have a tough time interpreting early news and its eventual impact on the upcoming session. But the process of pre-market preparation isn't as hard as it looks when you organize your wake-up efforts into key zones of market action. Start with these 15 tips and techniques to get ready for the market day. 1. Check CME index futures: Pull up the S&P 500 (SPX) and Nasdaq-100 (NDX) futures and note current price levels. Then look at the overnight action, marking out the highs and lows posted through that period. 2. Review macro forces :Catch up on oil, currencies and precious metals to see how the rest of the world is trading them. Check out Asia and Europe to find out what moved their bourses while you were asleep. These hot spots establish key themes for American traders when the market day gets started in the Big Apple. 3. Filter the news flood: Focus first on news that affects your open positions. Upgrades, downgrades and earnings all trigger volatile spikes that can hurl prices well above or below closing levels. Then look at Tier-1 (top broker) activities to find out what's hot and what's not. 4. Watch other players: Many broker interfaces let you watch ECN price action three or four hours before the New York open at 9:30 a.m. Use this quiet time to observe how other players are dealing with big news or overnight shocks. Canadian Solar

Click here for larger image. 5. Note levels: Price levels that come into play in the pre-market can turn out to be major pivots during the regular session. (Please see chart above.) Reversal pivots at this time often hide big players trying to set boundaries, or get out of oversized positions. Jot down these numbers and keep them close when the real action gets underway. 6. Watch support-resistance: Take note where price moves in the pre-market, relative to daily support or resistance levels. Specifically, does good news send price above or into obvious resistance? Conversely, does bad news drop price into or through obvious support? A pre-market move that can't trade through a major barrier often prints the high or low for that day.

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7. Look for safe exits: Early birds can find safe exits or hedge losing positions when shock events hit the newswires. The best escape route comes right at 8:00 a.m. (EST) when traders using discount brokers get their first quotes of the day. Post a pretty bid for them to execute before they realize that Armageddon has struck the markets. 8. Establish a first bias: Compare early price action to the prior day's close, and think about who will get trapped and who will benefit from the imbalance you're looking at. This quick analysis will help you avoid weak-handed plays at the opening bell. 9. Respect daily seasonality: Follow the trend when Monday's pre-market leans in the same direction as Friday's close, but fade it when Tuesday's pre-market tracks Monday's close. Look for continuation of the trend on Wednesday and Thursday, followed by a battle of opposing wills as the week draws to an end . 10. Find the day's theme: The majority of stocks on your screen won't do anything that day, so it's your job to uncover the handful of issues ready to move. Triage the list by watching pre-market volume because it shows where other traders are risking their money. 11. Think irrationally: It doesn't matter if pre-market news is good or bad. More importantly, how does it shake up expectations? If you can't figure this out for yourself, find experts you trust and listen to them. 12. Place deep limit orders: Place all kinds of limit orders in the pre-market session at prices where no one in their right mind will hit them and give you the bargain of the century. Then sit back and watch these get filled because other traders panic or just haven't woken up yet. 13. Have a plan: Bulls and bears make money, while pigs get slaughtered. If you take passive approach to the trading day, you set yourself up to get played by other traders. So determine, (a) who has the upper hand, and (b) how aggressive you want to trade after the market opens for business. 14. Avoid the crowd: Traders chase news-triggered momentum into pre-market positions and then get burned in the first hour of the regular session. A better strategy is to stand aside, let the stock establish an early trading range, and then enter on a range break. 15. Cover dips and sell spikes: Speculative groups, like small biotechs, can jump big percentages in the pre market, when they report drug application news. These spikes often print the daily highs, so use them to take profits and wait for reentry at lower prices.

Alan Farley provides daily stock picks and commentary with his 'Daily Swing Trade' newsletter. Recently, he has featured analysis of Genentech(DNA), Deere(DE), Teva Pharmaceutical(TEVA), Compass Minerals(CMP), Tupperware(TUP) and Coinstar(CSTR)

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