How Active Traders Approach and Track the Market

Say you've been investing for a while, know the market relatively well, and feel ready to take the next step toward more active trading. You're not thinking about 10 trades per day, but certainly more than the five or 10 per year you'd been making. 

This evolution is a major step and shouldn't be taken lightly. But for time and simplicity's sake, let's assume you've decided to trade stocks—options are another discussion—and figured out how much of your portfolio you want to allocate. 

You should be comfortable with the prospect of losing money if the market goes against you, but that's not enough. You also need to decide how you'll follow the markets so you can trade from a position of knowledge. That means developing a daily routine and having your tools ready. Before starting, decide what and how you want to trade, what metrics to watch, what tools to consider, and how to prepare for a typical session.  

No textbook can say exactly what trading method might work best for you. 

"There's no one right way to trade," said Nathan Peterson, director of derivatives analysis at the Schwab Center for Financial Research. "Everybody has their system, their knack, what works for them, and their approach." 

Some traders regularly follow a basket of around 10 stocks they already know well. They do this to get a sense of how this small handful of stocks may trade around earnings announcements, monitor their technical performance, and evaluate day to day how they're affected by broader market trends. Over time, they'll get familiar with each stock's chart performance and can better detect meaningful pattern changes. 

Others may choose to zero in on index performance or a certain sector, focusing mainly on technical factors (chart patterns) to spot trends and patterns affecting a wider variety of stocks. Still, some may elect to spend more time on fundamentals (earnings, news events, etc.). For example, a strong or weak company quarterly earnings report can hurt its shares, while a news event like a Federal Reserve rate hike can sometimes hurt the entire market. 

Get familiar with an area of interest like a sector and follow it for a while, perhaps using the paperMoney^® virtual trading feature on the Schwab thinkorswim^® platform to sharpen your skills risk-free before going full steam and using real money. Then try trading other sectors and methods, again using paperMoney. Find out what you like to trade and which markets or sectors interest you. 

Also, consider going back to school. Not a brick-and-mortar one, naturally, but consider Schwab's online learning resources or Investing Basics video series as a start. Attending class won't prevent you from losing money in trading (everyone has bad trades), but it can teach you strategies and general market behavior as well as help you create an investing plan.  

Trading the market more actively also means knowing when you want to enter and exit trades and stick to a strategy outlined in your investing plan. Don't let the FOMO—fear of missing out—become a factor. 

"If it's my money being put into the stock market, I want to do a high-conviction trade," Peterson said. "Scrutinize which stocks you believe are worthy of your capital and be patient in terms of letting potential opportunities come to you. If you're waiting on a pullback, don't get impatient and say, 'It's close enough, I'm in.' Wait for the opportunities to come to you and consider technical analysis to help confirm entry/exit points regarding timing. If you miss a trade, there will always be other opportunities down the road." 

Once you decide how you want to trade, develop a system to approach a typical day. Having a routine doesn't make you immune from losing money, but it can help prevent mistakes like chasing parts of the market you're not familiar with or trying to do too much at once. Again, not everyone follows the same routine, but some Schwab trading veterans recommend the approaches below. 

Check futures: Markets never really stop trading. Futures on major U.S. stock indexes, individual stocks, and commodities and currencies trade most of the night. When you get up in the morning, one of the first things you may want to do is log in to thinkorswim to figure out where the market went while you slept. Plenty of useful online tutorials are available to get you started.  

"See if futures are up or down and then check foreign markets and see where they are," said Kevin Hincks, senior manager of education at Schwab. "Then check any economic data out before the open and see how it moves the futures market." Here's how to monitor the calendar on the thinkorswim platform.  

Set up your screen: Besides coffee, one of the most important things to help start the day is having your screen ready with all the important benchmarks. If there's a sudden market move, you don't want to have to scramble to figure out why.  

"Every watchlist I make starts with U.S. equity futures at the top, then after that, I have VIX futures, U.S. Treasury futures, Crude Oil futures, Gold futures, and the U.S. Dollar Index. I like to organize my watchlist by product type, but that is a personal preference; for example, all futures first, then individual equities," said Alex Coffey, senior manager of products and segment management at Schwab. "I include some of the most widely traded stocks next, such as the 'Magnificent 7' companies. After determining what's on the move, I check the calendar to confirm what economic data and earnings are scheduled to come out." 

Finger to the wind: When you arrive at your desk, have a sense of the previous day's activity. Review the charts of major indexes to know what sort of market you're in. Like a player entering a game, you need to know the score and what inning it is. 

"When you first come in for the day, have a sense of what type of market we're in—bullish, bearish, or sideways," Peterson said. "As you drill down, see if there's a correlation between what the overall market does and what your individual stock or basket of stocks do relative to the broader market. Yes, generally a rising tide lifts all boats, and a falling tide can sink them. But relative strength or weakness to this tide, over a given period of time, can give you an indication of whether a security is under accumulation or distribution."  

In other words, what story is the stock's chart telling you? Does the price action suggest investors want to be in it? And then cross reference the performance of that stock with the overall market to determine relative strength or weakness.  

Check the calendar: Stay aware of the time of year and its possible impact. While seasonality isn't the final word, it can play a role. If it's late December, the market might be more prone to have a "Santa Claus" rally. If it's early January, of course, people may be selling winners from the previous year, pushing stocks lower.  

"I'm always cognizant of where I am on the calendar," Hincks said. 

Whether it's on the wall or a desktop screen, traders need a reliable calendar to mark key events, announcements, and data releases (see chart below). Schwab's thinkorswim platform provides a calendar you can customize—select the MarketWatch tab (red rectangle) and then the Calendar subtab (green rectangle) to get started.

Watch key indicators: Once the bell rings, consider following a handful of key metrics that will often set the tone.  

"There are three things I look at constantly," Hincks explained. "They are the U.S. dollar, yields on the 10-year U.S. Treasury note, and crude oil. All of these can affect stocks." 

Determine momentum: This means watching the path of your stocks either on charts or by checking the options market for a sense of direction. All of these metrics are easy to set up on your Schwab thinkorswim platform. You can even use thinkorswim to create alerts on prices if a stock hits a level you want to watch.  

"I tend to look at pivot points on individual stocks I'm trading," said Joe Mazzola, director of trading and education at Schwab. "I also focus on unusual options activity to find some opportunities. I look for stocks gapping up or down and follow the news and charts as to why." 

Emphasize risk management: Some traders choose to only risk 1% to 2% of their capital for each trade. By using this as a starting point and knowing your downside exit point (also known as your stop price), you can better determine how many shares to allocate to each trade. 

Consider thinkorswim tools to customize information: One thinkorswim tool Mazzola recommended is called Trade Flash. You can find it on the left sidebar of thinkorswim. 

It streams all kinds of information about what large traders are doing—those whose volume can sometimes move markets. Trade Flash also streams real-time intraday commentary from a network of more than 500 professional traders.  

Here's some info that can pop up in a flash: 

• Events like third-party analyst upgrades/downgrades 
• Block Trades Indicator that displays large quantity trades, which can affect market volatility 
• Trade imbalances order 
• Trading floor events 

Trade Flash also provides information about substantial price moves—each with detailed written context—as well as "unusual" trades. What type of activity might be deemed unusual? Flashes might highlight different combinations of price, volume, volatility, and liquidity—anything that might help you uncover what could be potential opportunities worthy of a second glance. 

"I look at Trade Flash to see where large block orders are filling," Mazzola said. Larger orders from pension and hedge funds often can have a big impact on market direction. 

Watch the charts: Maybe you only trade based on fundamentals like earnings and central bank policy. Even then, you should learn basic charting and use it to follow the stocks and indexes you monitor most closely. Technical factors on the charts often determine direction, perhaps providing trading opportunities beyond the bare fundamental picture. 

"You need to become familiar with technical analysis," Schwab's Peterson said. "If I come in fresh, then I'm looking for technical setups like a stock bouncing off a longer-term moving average or a key support level or breaking above resistance with conviction, which means heavy volume." 

For instance, say a stock traded between $400 and $500 for several months but recently showed strength by breaking above $500 on heavy volume. That could be a strong clue that the risk/reward setup of a long entry has improved, at least technically speaking. Especially if it's on firm volume and in an otherwise dull market. That was the case earlier in 2024 with a recent tech stock, which then went on a parabolic rally after breaking through key resistance around $500 for most of 2023. That won't work every time, and it's also important to learn how to place stop orders below the market to avoid sharp declines. 

You'd only be able to make trades like that if you're closely following the charts. Fundamentals may be good enough if you're simply an investor, but trading puts technical factors on your list even if you're not wild about the idea of charting. Schwab videos like this one can teach you some basics about market technicals. 

In the customizable thinkorswim left sidebar, Trade Flash allows you to monitor the latest action in the stocks you follow and track helpful market stats in real time (see chart below). These include third-party analyst upgrades/downgrades, block trades, trade imbalances, trading floor events, and more. Add Trade Flash to your customizable thinkorswim sidebar by selecting the plus sign (red square) at the bottom left, then Trade Flash, and entering the stock symbols you want to follow.

Prepare to get out: One key element is exiting a bad trade before it hurts you even more. 

"If my thesis for establishing a position proves to be false, it's time to cut bait and admit I was wrong," Peterson explained. "Be willing to admit you're wrong and do your best to minimize losses when a trade goes against you. The emotional aspect of trading (fear/greed/pride) is one of the biggest potential hurdles for traders. All your trades will provide valuable experience, but only if you're willing to learn from your mistakes and make appropriate adjustments." 

Practice is important. Peterson recommended spending time paper trading and monitoring how you deal with losses before trying it for real. 

As the session winds down, it's tempting to think of dinner plans or traffic. Don't get distracted. The last hour of the trading day is often the most volatile and can provide clues about where things might go the following trading day. 

"Between 3 p.m. and 4 p.m. ET is when you get the real identity and direction of the market," Hincks said. "If the market is jittery and sells off at the end of the day, that tells you something. Always watch the last hour of the trading day and the last hour of the trading week. If the last hour of weekly trading is positive and the rhetoric is positive all weekend, the chance of opening higher Monday is pretty strong." 

After the bell: It's still too early to shut your screen down. When the closing bell rings, news often picks up. That's especially true during earnings season when many companies report after the close. You can't be an expert on all the stocks in the S&P 500^® index (SPX) or the Russell 2000^® Index (RUT), but when any company you follow closely is reporting, your afternoon could be busy. And stocks do continue trading after the close of business on Wall Street, an after-hours market you still have access to through thinkorswim. 

You need to know the numbers and guidance when your company or companies report, and the futures market can give you a quick read on how Wall Street reacted. That said, be ready for large swings.  

"Liquidity is less and stocks tend to be more volatile after hours," Peterson said. "But maybe I see something interesting because of news that broke or earnings released and I want to be aware of it the following day. Traders generally like to go to where the action is because stocks in the news typically have the potential for a larger move, one way or the other." 

Before logging off: It can also help to check market stats like daily volume and the number of stocks that advanced versus the number that declined. A market that rises sharply in low volume could indicate lack of widespread conviction in the rally. "Big volume days mean more than light volume days," Hincks said. 

And if major indexes fell but advancing shares outpaced decliners, it could indicate that just a few large names weakened while much of the market gained, giving you a different spin than you might get from watching the major indexes alone. Rising volatility in a rising market can also be a sign that something needs to give. 

Trading actively can be frenetic and intense, even if it's only a few trades a week or month. That's why it should involve a real commitment to learning and practicing. Neither will prevent bad trades or possible loss of cash, but both could set you up for a higher chance of success.