What Are the Phases of Trading Analysis?
In order to follow a structured system, we should break our analysis up into various phases. First, select a market that aligns with your strategy to avoid wasting time. Next, review past price movements to understand the current context. Then, estimate the probabilities of different outcomes. If a favourable scenario appears, enter the trade. Finally, manage the trade as it unfolds, adjusting your approach or exiting when necessary.
This structured process helps you trade strategically, reduce risk, and increase your chances of success.
The Five Analysis Phases
Over the years, I’ve found a formula that's most effective for the broad phases that need to be included in a trading system. In each phase, there will be individual steps that will depend on the method of analysis and trading you're using, but most approaches are going to follow this broad structure:
- Market Selection
- Primary Analysis
- Secondary Analysis
- Trade Entry
- Trade Management
Let’s go through the purpose of each stage:
Market Selection
This is your process for efficiently and effectively identifying the right market to focus on.
A lot of traders waste time and effort trying to find opportunities in the wrong market. Instead, by having a process to filter out and find the right markets, you dramatically increase your chance of having profitable trades that match your objective.
Most importantly, the market should be one that you believe you can identify potential outcomes and estimate probabilities in, without too many guesses or blind assumptions. Therefore, the context should be clear and the price should be near a meaningful levels that makes it easier to anticipate what activity may happen next.
In addition to that, the market should be in an area that is more likely to provide the types of opportunities you look for. The factors you might consider for this will depend on the specific method of trading you use.
Primary Analysis
In this stage, you’re trying to understand what’s happened in the market so far, and using that to help interpret the current situation. This analysis is all about looking backwards on your charts.
I have a set order I follow for identifying core information about the context of the market. I start by identifying the structure of the market, including the characteristics of the price moves within each wave. My main focus is on identifying what this meant for things like volume and liquidity.
Based on that, I’ll then find where there are significant levels that are likely to cause changes in market activity in future. These will help me identify potential outcomes.
Finally I’ll look at the micro-structure and order flow to understand how the price is currently behaving and where we are in relation to critical points on the chart.
These factors give me the context of the market that I can use to forecast potential outcomes and estimate the probabilities of them happening. Which is what I use in the next phase.
Secondary Analysis
The secondary analysis is about anticipating what may happen next. You’re using your primary analysis to identify potential outcomes.
You start by assessing first-order outcomes (what may happen immediately) and then second-order outcomes (if a first order outcome happens, what may happen after that?) and beyond.
You will then use the contextual information from your primary analysis to estimate the probabilities of these outcomes.
Trade Entry
Once you’ve assessed all potential outcomes, you can now determine which situation (or multiple situations) have a positive expectancy.
It may be that the current situation doesn’t provide any opportunities, but specific future outcomes could lead to a favourable opportunity. In these situations, you can set an alert and revisit the market once the outcomes unfold.
This phase also involves deciding how to structure the trade to limit downside while maximising the upside. On a basic level, you'll be choosing a percentage at risk based on how positive the expectancy is.
But on a more advanced level, you can strategise how to structure the trade and initial trade management decisions to tilt the odds more in your favour. If you do this correctly, you can take a positive expectancy trade and enhance it even further, so the overall result is greater.
Trade Management
After the trade is open, you continue analysing the market as price movements develop and assess what the next potential outcomes and probabilities could be.
Based on this, you can take strategic risk management actions (e.g. scaling in, scaling out, or moving your stop loss) to align with your assessment of the potential outcomes.
For example, if a particular price move will mean the probability of positive outcomes is reduced significantly, you may want to place your stop loss based on that outcome occurring. As outcomes take place, you can reassess the expectancy of the next moves and scale in or out of the trade in proportion to that.
Once the outcomes no longer favour your trade, you should begin looking for a trade exit.
Bringing It All Together
This might seem complex at first, but you're already doing many of these things subconsciously without realising it.
In reality, the processes I've outlined are much more simple than they seem on face value. The key is that every aspect has a purpose and an objective, so you have absolute clarity about what you're doing and why.
Members of the Duomo Trader Development Program learn this in a logical way using the Duomo Method, and don't usually struggle to put it into practice. They're able to understand it and apply it without too much confusion or difficulty.