Day Trading Setup Evaluation Cycle


For day traders, evaluating trading setups in real-time is a fast and almost subconscious process. Hence, day traders must focus on post-trade evaluation to improve their day trading performance.

However, day traders often neglect to evaluate their trades ex-post. Day traders tend to think that their job is over after the trading session closes. As a result, they overlook the critical day trading setup evaluation cycle.

Record Reasons For Your Trades

You must have your reasons for taking each trade. Having reasons is not enough. Write them down.

For instance, you took a 9/30 trading setup as prices found support at the daily pivot level. It is also a two-legged pullback from the day’s high in what seemed like a strongly trending session.

Pen down these reasons.

However, do not let this record-keeping affect your trade execution. Quickly scribble your reasons for taking the trade, and refocus on the ongoing trade.

Bear in mind that you should write down your reasons right after you decide to take the trade setup. You must record them before the trade is over. We do not want the result of the trade to taint your original reasons for taking the trade.

You may have good reasons for making a losing trade or ridiculous reasons for entering a winning trade.

In any case, for your day trading setup evaluation, you need to know the real impetus for taking each trade. Hence, you must record our reasons as soon as possible.

Ensure Consistency in Your Trades

Before you analyze a trade setup, make sure that it is consistent with your day trading plan.

A trade that is inconsistent with your trading plan is a rogue trade. Rogue trades should not be evaluated.

Admit that it was a mistake, and work on your discipline to follow your trading plan.

Need help with discipline? Take a look at The Disciplined Trader by Mark Douglas.

Think of why you took the rogue trade but DO NOT check it for price action nuances.

For productive day trading setup evaluation, you must compare apples to apples.

If you planned to take 9/30 trades but ended up taking a trade based on a moving average channel, you have lost the basis for comparison.

Start comparing after you have picked out the apples.

Evaluate and Refine Trades

Examine the reasons you wrote down earlier. Good reasons generally lead to profitable trades.

Do trades that bounced off pivot levels do better?

Aresuperior to one-legged pullbacks?

Keep probing your reasons for taking each trade. This is a crucial step to build your confidence as a discretionary day trader. This step is also a chance to confirm your understanding of price action.

However, avoid hasty conclusions based on a few recent trades. You always need a decent sample size before coming to any conclusion.

Remember that we are not looking for the perfect setup. We are looking for factors to help us avoid bad trades, not to eliminate losing trades.

Bad trades are not losing trades. However, taking bad trades over time does make you a loser.

Complete The Day Trading Setup Evaluation Cycle

To complete the cycle, you must consider our analysis result in your future search for trading setups.

For instance, if your study concludes that two-legged pullbacks do better, then you should give more weight to setups with two-legged pullbacks.

You can make use of this evaluation cycle not just for live trading, but also when you’re trading in simulation mode.

For independent day traders, the ability to self-learn is essential. And the day trading setup evaluation cycle is the best self-learning process.

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