A commercial airline pilot goes through an extensive pre-flight checklist to avoid problems once the jumbo jet goes up in the air. You also need to go through a trade checklist before you blow up and complete a live trade. But how often do you sit in front of your computer, open your trading platform and start looking for trades without going through a checklist to make sure you're doing it right? For most traders, this is the way they work all the time, and this is an important reason why they don't make money.
Trading plans or checklists may seem boring to you, but if they do, it's because you don't think about them properly if you consider them as "cheat sheets" that can actually make you a more profitable trader. I will change them from another Look at perspective.
A trading plan / checklist acts as a filter, in which you enter your given trading criteria, and which not only acts as a filter for trading configuration, but also as a filter for trading errors. We all need a trading plan to stay on the right track and stay on the ground. I use a mental checklist every day before looking at the charts. At the beginning, however, you have to print this out or write it down and physically go through it every time you look for trades until you have made it a HABIT!
What follows may be a scaled-down or thinner version of what your final pre-trade checklist will look like, and I encourage you to expand yours so that it becomes more detailed and, so to speak, leaves no stone unturned. Here's a solid foundation / sample checklist to start creating yours with.
Checklist for technical analysis:
1. Have I marked important levels and trends?
Have you reduced the weekly chart timeframe and started identifying key long-term horizontal support and resistance levels?
Did you determine the current long-term / general trend or the market situation? Does the weekly chart move up, down or sideways in a large area? Find out next.
Then did you drill down to the daily chart timeframe and use other obvious types of support and resistance? This would include (but is not limited to) horizontal levels, moving averages (if trending), 50% traceability levels, and event areas.
What is the short-term daily chart trend? Is there a trend at all or is it consolidating in one area? Is the market just restless? Determine whether the current market movement is trending or whether it is a sideways market. The answer to this determines how you approach this market.
2. Is there a signal?
Next, is there something worth trading here? Is there an obvious price action signal that fits the current market picture? Does this mean that the signal "makes sense" with what the market is doing? For example, if there is a strong uptrend, only consider buy signals, not sales. If the market is tied to reach, you can also buy signals from support and sell signals from resistance. We essentially ask ourselves whether there is a suitable entry here, be it a price action signal or simply a "blind entry".;; Remember, we need two out of three: trend, level, signal, ideally all three, but sometimes there are only two.
Most importantly, if an obvious trading setup doesn't come to you within a few minutes of watching it in the daily, 4-hour, or 1-hour chart timeframe (assuming you've improved that skill), it's time to to keep going. There is nothing worth trading on that day.
Remember to be flat (or neutral / not on the market) is a VERY profitable position compared to a low probability trade and the loss of money. For more information, see this lesson on filtering good and bad trading signals.
3. Is there a confluence of factors / evidence?
I briefly mentioned this above, but it is so important that it has to be hashed again …
Once you have identified a trading signal, even if it is an obvious one, you need to ask yourself if it is also a confluent trading setup. Does that mean there are OTHER supporting factors that aren't just the price bar itself? Does the retail setup make sense in the context of the story that the price action tells you? If not, you may want to get away from this signal. Remember that this filter / checklist is in place to ensure that only the best trades make it. Think of this as a way to filter out all the trash and just leave the "pure" trades. You will lose trades no matter what, but our goal as a trader is to improve our performance as much as possible and limit losses and drawdowns. A checklist like the one you're reading about shows how to do it.
Example of a confluent trading pattern within bars. This signal matched the downtrend and resistance (8/21 day moving averages are red and blue lines):
Example of a confluent counterfeit trading pattern. This signal coincided with the downward trend and formed an important level of resistance …
Summary of the checklist for technical analysis:
Identify / determine general market conditions and levels so you can decide which direction you want to trade and where on the chart you want to trade. Look for high-probability entry scenarios that make sense given the pre-determined market conditions and levels. You may want to issue daily trade confirmations that you go through every day before you even begin the checklist process or before you open your charts. If you gain experience and master trading strategies for price promotions, you can and should include additional entry signals and entry scenarios, make them part of your checklist and not only do this mentally, but only when you are seriously trained. Remember we are trying to rewire your brain to develop positive trading habits. It takes time, persistence and commitment to convert actions into habits.
Mental / psychological questions:
4. Am I in the right mood to enter this trade?
Are you in a calm, collected, and generally objective state of mind before entering this trade? Did you enter this trade for the right reasons or is it a trade in revenge or greed? Of course, you have to be honest with yourself here and react to this honesty, otherwise it is a waste of time. Remember you are plunging into the trading world where there is no boss and no one looks over your shoulder to hold you accountable. You have to do the right thing when no one else is looking – trading may be the ultimate test of your own character!
Some other things to consider are: Have you just made a big profit that has taken your confidence in your trading skills to an unsafe level? Traders often lose money because they become overly confident and take bigger / bigger risks in the market. Remember that you are only as good as your last trade. So stay focused and stay in the right trading mentality. Otherwise, your last trade can negatively impact your next one.
5. Am I mentally and financially ready to take this risk?
Before you start a trade, ask yourself, are you mentally prepared for the results of the trade, do you win or lose? This is where the great trade teacher Mark Douglas shines, immersing himself in the psychology of trade and really pounding home that the outcome of every trade is essentially random, a 50/50 shot, and that's how you have to look at it. However, this does not mean that overtime over a SERIES OF TRADE is only 50/50. This means that for every trade advantage there is a random distribution of profits and losses. So you could have 20 losses in a row, followed by 40 winners in a row (rare but possible). However, this is a 66.6% win rate over the series of 60 trades. But most traders can't even endure a couple of losses in a row, let alone 20, are you catching my drift here?
You have to remember that any trade viewed in a vacuum is simply irrelevant. As a result, you have to think and act in accordance with this fact. That is, if you analyze your trading performance, you cannot worry about a trade at all. It is the overall results, the series of many trades that prove your performance. It will make you a WORLD WELL to remember these points every time you enter the next trade. This attitude and approach is part of my set and forget trading philosophy. Remember that you have to let your trading advantage play without interference from your side, otherwise you will not be able to correctly assess the performance over time as a trading approach.
Questions about money and trade management:
6. Do I know my risk amount per trade (1R)?
If you don't have a predetermined amount of risk at which (1R = risking dollars), you probably won't make any money as a trader. You have to sit down and determine how many dollars or euros or pounds or whatever you can realistically afford to lose per trade. Make this an amount that you may lose 10 to 20 times in a row and still be financially and mentally stable. I always ask traders to do a simple risk sleep test, in which they determine their ability to forget about their business and let them sleep, whether or not they are risking a healthy amount.
7. Did I use the position size correctly?
Did you apply the correct position size to trading? This goes along with question number six above. If you don't understand the position size, please read my article on risk reward and position size to learn more. In a nutshell: position size means adjusting the number of lots (your position size) to meet your set 1R risk amount per trade, while taking into account your stop loss placement, which we'll talk about next. Always determine the stop loss placement before the position size. Your risk per trade should remain the same. You will find the best stop-loss placement to give the trade a good chance of training (don't set stops too close) and then adjust your position size to your 1R risk.
8. Is the risk reward realistic there?
Is the risk rewarded there? Does this mean there is a logical profit target relative to the major chart levels nearby that can help you achieve a 2: 1 winner or more? You need to make sure that both your stop loss and profit target make sense in the context of the surrounding market structure. To learn more about this, read my article I wrote a few years ago on how to place stops and goals like a pro.
9. Do I have a plan to end this trade?
Do you have an exit plan for this trade? What is your overall plan to end this trade for either a profit or a loss? Are you planning to get off at a certain horizontal level, or are you planning to track your stop and let the trade run because of a strong trend? Will you hit breakeven at some point or just bet and forget? These details should be ironed out before entering retail. If there is a dramatic turn of events while trading is active (such as a huge price reversal against your position), you can intervene, but in most cases you want to pre-set and stick to your exit strategy no matter what. For more information, see my exit guide.
10. Does it fit my trading plan?
If you have successfully answered all of the above questions, your answer to this last question should be "Yes". Your trading plan can be a checklist like this, although yours is more detailed. Only if a trade passes every filter, you should give it the "OK". Don't worry, at some point, going through the individual filters becomes a habit and something you hardly ever have to think about. You will intuitively know if a trade meets all your filters and criteria because you have manually reviewed your checklist / plan so many times that it has burned itself into your brain and becomes part of you.
We all need leadership in life, we all need mentors to improve and excel. I can be your trading mentor by teaching you what I know and what I have learned about my trading courses and the member community. However, it is up to you to do the “hard work” and follow up on what you have learned. Today's lesson is another part of the trade puzzle. You actually have to create a checklist like this and use it for your daily trading. If you do this, you are guaranteed to see an improvement in your trade. You will of course be more selective and methodical about which trades you make and how you trade the market.
Make this trading checklist part of your daily trading routine and you will be wondering how you have ever traded without it.
What do you think about this lesson? Please let us know in the comments below!