SMB Fundamental #1: Proper Preparation

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Last month I wrote a post about SMB Fundamental #7–Reviewing Your Important Trades. Today I would like to discuss #1–Proper Preparation. All trading success begins with proper preparation and that is why it is #1 on our list of trading principles that must be followed for each trade.

Part of my morning pre-market preparation is to review the price action from the prior day’s In Play stocks. I identify these stocks by reviewing the prior morning’s Gameplan and the prior end of day’s Radar snapshot. By reviewing these stocks I am able to prepare myself mentally for the most likely trading scenarios. Here are a list of some things I ask myself while reviewing these names?

  1. Was the stock strong or weak the prior day?
  2. Were there key levels intraday that traded significant volume?
  3. Is the stock in a long term downtrend/uptrend?
  4. Was yesterday’s move significant on a time frame greater than intraday?
  5. What trades would I take simply based on technical analysis?
  6. What type of confirmation would I look for on the tape to enter a trade or be more aggressive?

There are a lot more questions to be asked during preparation by I am sure you get the basic idea. Let’s take a look at CREE. It has been in a monster downtrend for a very long period of time. It reported earnings after the Close on Tuesday. The initial reaction was negative as the numbers seemed to be a disappointment. But by the next morning CREE had made higher lows in the pre-market and eventually went on to closing near its high. This is bullish price action.

For those who like to use “candlestick” patterns as part of their analysis CREE had an “engulfing” bar on the daily time frame yesterday on very heavy volume. And if that type of analysis helps you to feel more confident in trading CREE on the long side then great! Use it to help you pull the trigger when CREE signals to you intraday that you should be getting long. Here is my analysis for the price action from today. The three possible long entries highlighted all represented greater than 1:5 risk/reward ratios that we teach our mentees to search for each day.

Steven Spencer is the co-founder of SMB Capital and SMB Training and has traded professionally for over 15 years. His email is [email protected]. for a free trial of the Stocks In Play call send an email to [email protected].

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