Trading Buying Checklist | Trading Lesson
Trading Strategy

Trading Buying Checklist

Master the art of systematic trade evaluation with a proven checklist that streamlines decision-making and improves trade outcomes through structured analysis

In trading, having a structured checklist can streamline decision-making and improve trade outcomes. This session focuses on how to apply a buying checklist effectively, using insights from chart patterns, technical indicators, and risk assessment to pinpoint high-potential entry setups. By following this checklist, you can build confidence in your analysis and reduce the impact of emotional decision-making.

Learning Objectives

By the end of this lesson, you will be able to:

  • Utilize a buying checklist to evaluate potential trade setups
  • Assess the significance of consolidations on higher timeframes (monthly/weekly) for strong entries
  • Analyze key indicators, such as the 10-week EMA, for timing breakouts effectively
  • Leverage subtle clues and confluence for enhanced conviction in your trades
  • Evaluate potential upside versus risk to determine the viability of a trade

Major Monthly/Weekly Consolidation

Explanation: Long-term consolidations (monthly or weekly) indicate periods where a stock stabilizes and builds support. This base serves as a launchpad for future price movements. In general, buying near the end of a consolidation offers a better risk-reward ratio because the stock is at a stable support level.

Action Step: Look for stocks that are exiting a multi-month base pattern and beginning to show signs of upward momentum.

Proximity to the 10-Week EMA

Explanation: The 10-week exponential moving average (EMA) acts as a key indicator of a stock’s trend strength. Buying near the 10-week EMA typically provides a lower-risk entry point. However, if a stock is extremely extended above this level, it may be due for a pullback, making a breakout less likely to succeed.

Practical Tip: Check if the stock is close to its 10-week EMA. Extended stocks (far above the 10-week EMA) often have limited upside and are more likely to retrace.

Identify the Change in Character

Explanation: A change in character signals a shift in market sentiment, often indicated by increased volume or a “bull snort” (a small surge in price) out of a base. This is typically the first sign that a stock is preparing to move higher.

Examples of Change in Character

  • A sudden increase in volume
  • A gap up on positive news or earnings

Exercise

Identify recent examples of “bull snorts” or volume surges on charts of stocks that have entered new uptrends.

Relative Strength and Index Price Cycle

Explanation: Relative strength is essential when evaluating a stock within the broader market context. Stocks that show resilience during market corrections or outperform during rallies often have stronger breakout potential. Assess where the stock stands in the broader market cycle.

Action Step: Identify stocks that outperform the market index during a rally. This relative strength can help determine which stocks have higher breakout potential when the overall market sentiment is positive.

Daily Chart Pattern (Pattern within a Pattern)

Explanation: “Pattern within a pattern” refers to finding a smaller pattern (like a bull flag or inside bar) within a larger consolidation. This setup refines entry timing, allowing for better risk management while positioning for a potential breakout.

Examples

  • Look for a daily bull flag within a larger weekly base
  • Identify inside bars on the daily chart that signal contraction within a broader trend

Subtle Clues

Explanation: Small indicators like inside bars, volume dry-ups, and unfilled gaps provide subtle signs that a stock is poised to break out. These clues signal reduced selling pressure and increased demand, creating favorable conditions for a breakout.

Key Clues

  • Inside Bars: Price stays within the previous day’s range, suggesting consolidation
  • Volume Dry-Up: Lower-than-average volume, often seen before a breakout
  • Unfilled Gaps: Small price gaps that hold, indicating strength

Multiple Arguments/Confluence

Explanation: Confluence is the combination of multiple factors or indicators supporting a trade. The more reasons that align, the higher the probability of success. For example, if the weekly and daily charts align with the presence of a catalyst, the trade setup is more robust.

Exercise

Choose a stock and identify at least three factors (e.g., consolidation, volume spike, inside bar) that align to support a potential breakout.

Catalyst (Earnings, News, FDA Approval, Product Launch)

Explanation: A catalyst can significantly enhance the chances of a breakout. Earnings reports, product launches, or FDA approvals often create excitement and increase buying volume, driving the stock price higher.

Tip: Consider a catalyst as an additional layer of confluence. Look for events scheduled to coincide with a breakout attempt for better odds of success.

Evaluate Risk-Reward Ratio

Explanation: It’s crucial to ensure the potential upside justifies the risk. A minimum target of 3:1 (reward-to-risk ratio) is advisable. High-risk trades with low reward potential should generally be avoided.

Example

A stock that requires a 5% stop-loss with a potential 20% gain offers a 4:1 reward-to-risk ratio, making it a favorable setup.

Resistance to the Left or New Highs

Explanation: Stocks near new highs or with minimal resistance to the left side of the chart generally have fewer sellers. Avoid stocks with heavy overhead resistance unless the trade is intended as a short-term swing.

Practical Tip: Focus on stocks near all-time highs or those that have broken above recent resistance levels. These setups tend to have more room to run without significant selling pressure.

Action Items

  1. Select a stock from your watchlist and go through each checklist item
  2. Identify confluence factors and determine if the trade meets your risk-reward criteria

Conclusion

By following this buying checklist, you can improve your trade selection and position management. Each checklist item is designed to help you evaluate potential trades systematically, ensuring you focus on high-probability setups with favorable risk-reward dynamics. Remember, successful trading requires discipline and patience.