Before You Enter a Trade

I make my trading decisions based on technical analysis. I believe in developing a trading system and following it to a tee. But I don’t take just any old trade that gives me a technical set ups of course. Before I enter a stock I like to check a few things.

1. I back test the stock, just a little. I want to know what would have happened if I had entered the trade before. I like to go back and spot every time I would have gotten a trading signal in the stock in the past year and see what would have happened.

If I would have lost money I skip the stock, if I would have made money it passes this test. Remember all stocks have different personalities. If the stock doesn’t agree with your trading approach, skip it and find one that does.

2. I also like to check how strong the actual company is. Do they have growing earnings, if I’m bullish or lowering earnings if I’m bearish.

3. Finally I want to make sure that the stock is not going to have an earnings announcement anytime soon. I hate trading through earnings because they can be very unpredictable. No one can predict how a stock is going to react to an earnings announcement so it is best to not even try.

I would rather be out of a stock then to watch it gap against me 20% or more in 1 day. And although it rarely happens, it does happen.

Those are just 3 little things I like to look at before I decide to trade a stock. A stock that is giving be a great buy signal but does not pass 1 or more of these rules is probably better to pass from my perspective.