You must digest a vast amount of market information to reach simple conclusions about opportunity and risk. Start with cross-market analysis to answer the first question of the day: will local or world conditions lead the price action? Always consider the broad fundamentals but stay focused on the patterns and numbers of the major indices and your individual trade setups. Except for shock events, markets will follow the technicals since insiders trade most hidden news in advance of the public.

Identify the leaders and laggards of the major U.S. indices. Review the charts of each index to pinpoint current trading phases. Are they rangebound or trending? Are oscillators rising or falling? Do they converge or diverge with the price action? Each index displays certain characteristics that affect and distort daily results. Take the time to learn their construction and how individual stock movement can generate lopsided information. For example, a Microsoft rally or selloff can trigger significant price change in both the Dow-30 and Nasdaq-100.

Your positions depend strongly on the overall strength or weakness of the underlying market. Look at the most promising setups each day and confirm that they properly align with major market forces. You can enter positions against sentiment and come out as a winner. But over the long haul, you'll want to trade with the Big Picture. The odds for success decrease when individual entries do not track movement in the larger indices and market cycles. Besides, trading is a lot more fun when you're riding the wave, not drowning in it.

Markets tend to correct for many months at a time. But most participants focus on relatively brief periods of strong momentum where they hope to pocket large gains. Unfortunately these exciting times also awaken strong emotions and weaken risk management. During these active phases, participants violate personal rules, chase dangerous positions and develop an unhealthy sense of invulnerability. They also forget that this fast-paced environment will disappear quickly and little warning.

Proper preparation requires a reasoned analysis of the active market cycles. Review current sentiment and carefully identify larger forces, external influences and important news. Evaluate any special conditions associated with the new trading day and decide whether or not to shift tactics to match the short-term environment. This will determine how aggressive or defensive you need to be during that market session. For example:

• Should position size be increased or decreased?
• Should the first hour be avoided or traded?
• Should you plan for a major rally, selloff or reversal?

Most traders maintain a long-side bias. They tend to lose money during flat markets, bear markets and intermediate corrections by chasing stocks or buying inappropriate dips. You can avoid this when you collar each day after you perform your analysis. This collar is just like the leather version placed around your dog's neck. Use it to control your own negative instincts and impulsive behavior, especially during unfavorable market conditions. This collar defines the amount of risk you are willing to take on any given day. It also identifies what specific change of conditions will cause you to tighten or loosen that collar. Establish these guidelines and begin each session within their predetermined boundaries. Then don't change them until new conditions exert themselves.