Checklist for While I am Trading

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Checklist for While I am Trading

You have a plan of attack for the market, called your trading plan, and it should lay out the strategies you’ll use, how you’ll manage your money, position size as well as some rules and guidelines for your trading. But no two days are exactly alike, while we do our best to prepare, there may be subtle changes in the market each day that may affect our strategies. I am not a fan of blindly following a strategy and trying to fit it to every market condition. As primarily a trend trader I only want to execute my strategies in trending markets, therefore I have developed a little checklist which helps me focus on if the market is trending, in which direction and what I can expect from the day.

The checklist items work together to help confirm or deny trading opportunities.

  • What is the long-term and short-term trend: For me long-term is basically the overnight session, maybe a bit of a prior day and the new session. Short-term is the last 30 minutes to an hour or so. Ideally, I like trades where there is a shift in momentum on the short-term that aligns with the long-term. The question to ask is, what is the overall expectation, and what is the immediate expectation? I take trades based on immediate expectations, but if that goes against the overall expectation then I am much quicker to bail on the trade at any sign of trouble. If I am trading with the overall expectation, I am more inclined to give the trade some room.
  • Is the market exhibiting some sort of pattern? What may look like trend may just be a piece of a larger wedge pattern or range. Drawing lines on the chart along highs and lows will help isolate if there is are any patterns present. Pay attention to these.
  • Is there strong support or resistance anywhere? These are areas that have caused the price to shift very strongly in the opposite direction. Be care of strong bounces off these levels.
  • In which direction are the strong and weak moves? If all the really strong sharp moves are up, and all the weak moves are down, probably best to be trading on the long side until that changes (see: How to Trade the Trend and Spot Reversals).
  • How volatile is it? On a very slow day your profit expectations will likely be less than on a very volatile day. Base your targets and stops on the price action you have seen so far. You can only trade what the market is willing to give.
  • Would the strategy have worked already? If a few signals already occurred before you started trading, would those have worked out? If the market doesn’t seem to be respecting your strategy parameters, wait till it does. This may mean missing one trade, but it is better than trying to impose a strategy on a non-complying market.
  • Are there repeating tendencies? This one takes quite a bit of focus because you need to realize it in real-time, but are there repeating price movements? For example, the price moves higher, stalls, and then makes three attempts to move higher before finally breaking out. Next time the price moves higher, the same thing starts occurring. Finding certain tendencies can give you a little extra confidence for a trade, but don’t expect them to last for long. They may repeat 2, 3, maybe 4 times and then disappear. Use them for information while you can, but don’t rely on them too heavily (see: Pay Attention to Tendency and Price Action).

I go through this checklist while I am trading to make sure my own expectations align with what the market is offering. It helps tailor my expectations to the market, and stay focused on the immediate and overall outlook. Based on your strategies, you may choose to create your own checklist which will help you determine when you should be trading, when you shouldn’t be, and when it is time to trade in the other direction.

7 Step Trading Checklist Before Entering Any Trade

The video above focuses on the main aspects of the trading checklist and this article seeks to unpack further aspects of the trading checklist in greater detail.

Why You Should Use a Trading Checklist

Implementing a trading checklist is a vital part of the trading process because it helps traders to stay disciplined, stick to the trading plan , and builds confidence . Maintaining a trading checklist presents traders with a list of questions that traders need to answer before executing trades.

It is important not to confuse a trading plan with the trading checklist. The trading plan deals with the big picture, for example, the market you are trading and the analytical approach you choose to follow. The trading checklist focuses on each individual trade and the conditions that must be met before the trade can be made.

Your Trading Checklist

Before entering a trade, ask yourself the following questions:

  1. Is the market trending or ranging?
  2. Is there a significant level of support or resistance nearby?
  3. Is the trade confirmed by an indicator?
  4. What is the risk to reward ratio?
  5. How much capital am I risking?
  6. Are there any significant economic releases that can impact the trade?
  7. Am I following the trading plan?

Experienced traders know that finding a strong trend and trading in the trend’s direction, has the potential to lead to higher probability trades.

There is a well-known saying that trending markets have the ability to bail traders out of bad entries . As can be seen below, even if a trader entered a short trade after the trend was well established, the trend would continue to provide more pips to the downside than to the upside.

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Traders need to ask themselves if the market is exhibiting signs of a strong trend and whether ‘trend trading’ forms part of the trading plan.

Ranging markets tend to see price bounce between support and resistance to trade within a channel. Certain markets, like the Asian trading session , tend to trade in ranges. Oscillating indicators ( RSI , CCI and Stochastic ) can be of great use to traders that focus on range trading.

2) Is there a significant level of support or resistance nearby?

Price action tends to respect certain price levels for a number of reasons and being able to identify these levels is key. Traders do not want to be holding a short position after price has dropped to the key level of support , only to bounce back higher.

The same applies when price approaches a key level of resistance and typically drops lower shortly after. Trend traders typically look for sustained breaks of these levels as an indication that the market may start to trend. Range traders will on the other hand, look for price to bounce between support and resistance for prolonged periods.

3) Is the trade confirmed by an indicator?

Indicators assist traders in confirming high probability trades. Depending on the trading plan and strategy, traders will have one or two indicators that complement the trading strategy . Do not fall into the trap of over-complicating the analysis by adding multiple indicators to a single chart. Keep the analysis clean and simple and easy to view at a glance.

4) What is the risk to reward ratio?

The risk to reward ratio is the ratio of the number of pips that traders will risk in the hopes of reaching the target. According to our Traits of Successful Traders research, which analysed over 30 million live trades, traders with a positive risk to reward ratio were nearly three times more likely to be profitable than those who do not. For example, a 1:2 ratio means that a trader risks half of what he/she stands to gain if the trade works out. The image below further depicts this principle.

5) How much capital am I risking?

It is essential for traders to ask this question. Often traders blow up their accounts by leveraging the account to the maximum when chasing “sure things”. One way to avoid this is to limit the leverage used on all trades to ten to one, or less. Another helpful tip is to set stops on all trades and ensure that the aggregate amount risked is no more then 5% of the account balance.

Before placing a trade, ask yourself, “ how much capital should I use? ”

6) Are there any significant economic releases that can impact the trade?

Sudden market news has the potential to invalidate the “perfect” trade. While it is almost impossible to anticipate things like, acts of terror, natural disasters or systemic failures in the financial markets, traders can plan for economic releases like NFP , CPI , PMI and GDP releases.

Plan ahead by viewing our economic calendar which highlights major economic releases from the top trading nations

7) Am I following the trading plan?

All of the above is of very little use if it does not tie in with the trading plan. Deviating from the trading plan will result in mixed results and only frustrate the trading process. Keep to the trading plan and do not place trades unless the trading checklist has been completed and confirms the trade may be executed.

This Trading Checklist Will Take Your Trading to the Next Level

Last Updated on December 16, 2020

I think you’ll agree with me when I say:

It can be difficult to trade well with the amount of “noise” out there.

Price action, indicators, trend lines, Support & Resistance, Fibonacci, blah blah.

Where do you even begin?

Well, it turns out, you can use a trading checklist to skip all the fluff out there, and focus on stuff that really matters.

And in today’s post… I’m going to share with you, the 8 step trading checklist that will take your trading to the next level.

Then let’s get started.

Trading checklist #1 — Are you risking a fraction of your trading capital?

Here’s the thing…

You can have the best trading system but, without proper risk management, you’re still going to blow up.

You have a trading system that wins 50% of the time with 1:2 risk reward profile.

And you have a hypothetical outcome of L L L L W W W W

If you risk 30% of your equity, you’d blow up by the 4th trade (-30 -30 -30 -30 = -120%)

If you risk 1% of your equity, you’d have a gain of 4% (-1 -1 -1 -1 +2 +2 +2 +2 = 4%)

Having a winning system without proper risk management isn’t going to get you anywhere.

You need a winning system with proper risk management.

The recovery from the risk of ruin is not linear, it could be impossible to recover if it goes too deep.

If you lose 50% of your capital, you need to make back 100% to breakeven. Yes, you read right. 100%, not 50%.

That’s why you always want to risk a fraction of your equity, especially when your winning ratio is less than 50%.

So, how much should you risk exactly?

This depends on your winning ratio, the risk to reward, and your risk tolerance. I would advise risking no more than 1% per trade.

Here’re a few risk management tools for you:

And a quick training video on how to determine your position size…

Trading checklist #2 — Are you trading with the trend?

A mistake made by many traders is that they become so involved in trying to catch the minor market swings that they miss the major price moves. – Jack Schwager

I’m not saying trading against the trend is wrong.

But for new traders starting out, one of the best ways to improve your trading performance is, trading with the trend (and not against it).

Here’s what I mean…

By trading with the trend:

  • You do not require precise entry to make a profit
  • You have better odds for the trade to work out
  • You have a greater profit potential as the impulse move is stronger

Now, if you want to learn how to define a trend, go watch this training video below:

Trading checklist #3 — Are you trading from an area of value?

I’m sure you’ve heard the saying, buy low and sell high.

If you’re buying groceries, you know how much you’re willing to pay based on your past experiences. Anything above your expectations, you’ll not buy it.

But when it comes to trading…

How do you identify an area of value?

How do you identify what’s low and what’s high?

This is where Support & resistance (SR) can help you.

Support – An area with potential buying pressure to push price higher (area of value in an uptrend)

Resistance – An area with potential selling pressure to push price lower (area of value in a downtrend)

Here’s what I mean…

Dynamic Support & Resistance

What you’ve seen earlier is what I call, classical Support & Resistance (horizontal lines)

Alternatively, it can come in the form of a moving average. This is known as dynamic Support & Resistance (and I use the 20 & 50 EMA).

This is what I mean…

Some benefits of trading at support & resistance (SR):

  • You are trading from an area of value
  • It tells you when you’re wrong
  • It improves your winning rate
  • It improves your risk to reward

Watch this short training video below and learn how to use SR and improve your trading performance:

Trading checklist #4 — Do you know what’s your entry trigger?

Here are 3 fundamental facts of trading:

  1. Position sizing determines how much you’ll wager
  2. Exit determines whether you win or lose
  3. Entry determines the frequency of your trades

Entry determines the frequency of your trades, and that’s it.

Do not spend most of your time on it because there are far more important things to consider (like risk management, trend, trade location etc).

Now you’ve understood it…

Let’s look at some ways you can enter a trade:

Pullback

A pullback is when price temporarily moves against the underlying trend.

In an uptrend, a pullback would be a move a lower.

Here’s an example:

In a downtrend, a pullback would be a move higher.

According to the work’s of Adam Grimes, trading pullback has a statistical edge in the markets as proven here.

What are the pros and cons of trading pullbacks?

Advantages of trading pullbacks:

  • You get a good trade location as you’re buying into an area of value. This gives you a better risk to reward profile.

Disadvantages of trading pullbacks:

  • You may potentially miss a move if the price doesn’t come into your identified area.
  • You’ll be trading against the underlying momentum.

Breakout

A breakout is when price moves outside of a defined boundary.

The boundary can be defined using classical support & resistance.

Breakout to the upside:

Breakout to the downside:

You’re wondering:

What are the pros and cons of trading breakouts?

Advantages of trading breakouts:

  • You will always capture the move.
  • You are trading with the underlying momentum.

Disadvantages of trading breakouts:

  • You get a poor trade location as you’re paying a premium.
  • You may encounter a lot of false breakouts.

Whether you’re trading pullback or breakout, there’s always one question on your mind…

Do you wait for a candle close before taking a trade?

Here’s the thing…

There’s no right or wrong about it. Ultimately you need to find an approach that suits you best, and which you can execute consistently.

Some traders would prefer to wait for a candle close, whereas some are fine without waiting for “confirmation”.

With that said, here are some pros and cons for you to bear in mind.

Pros of waiting for candle close:

  • Improve your winning rate
  • Easier to execute psychologically as the price has moved in your favor

Cons of waiting for candle close:

  • You may get a candlestick which closed higher but has bearish annotation to it e.g. shooting star at area of support
  • You may get a poorer risk to reward if price moves away from SR quickly

Remember… entry only determines the frequency of your trades (and you shouldn’t spend all your time and energy here).

The exit determines whether you’ll win or lose, which is vastly more important. This is what we’ll cover next…

Trading checklist #5 — Do you know where to exit if you’re wrong?

“Place your stops at a point that if reached, will reasonably indicate that the trade is wrong. Not at a point determined primarily by the maximum dollar amount you are willing to lose.” – Bruce Kovner

Now you’re probably wondering:

How do I know when I’m wrong?

And the answer is simple. You’re wrong when your trading setup is invalidated.

Let me share with you a few examples…

Knowing when wrong at (AUD/USD):

Knowing when wrong at (USD/CAD):

Knowing when wrong at (EUR/GBP):

If you want to learn more, go watch this training video below:

Trading checklist #6 — Do you know where to exit if you’re right?

I’ll be honest with you.

You’re never going to consistently exit your trades at the highs/lows.

What’s important, however, is to exit your trades based on your objectives.

With that said, here are some ways you can exit your trades:

  • Support & resistance
  • RSI overbought/oversold areas
  • Trailing stop loss using structure

Support & resistance

It works by asking yourself the following questions:

  • If you’re long, where would seller come in?
  • If you’re short, where would buyers come in?

And here’s the answer…

This means if you’re long, it would be prudent to take profits at nearest resistance since there’s potential selling pressure to push price lower.

And if you’re short, it would be prudent to take profits at the nearest support since there’s potential buying pressure to push the price higher.

Here’s what I mean:

RSI indicator

You can use RSI indicator to identify overbought and oversold areas (above 70 for overbought, below 30 for oversold). This can also act as Support & Resistance in the markets.

I’ve learned this technique from Steve Burns, in his book, Moving Average 101.

Here’s an example:

This approach works well when the market is in a range, or the trend is weak.

You’re probably wondering:

But what about strong trending markets?

This is when trailing your stop loss is the best thing to do…

Trailing stop loss using structure

You know an uptrend consists of higher highs and lows.

You can use it to trail your stop loss below the previous swing low, till it gets broken.

In a downtrend, you can use it to trail your stop loss above the previous swing high, till it gets broken.

Something like this…

Trading checklist — #7 Do you know how to manage your trade?

Trade management can be an entire topic in itself.

But in essence, it boils down to 2 things:

  1. Scaling out your trade
  2. Scaling in your trade

1. Scaling out your trades

This means you’re exiting a partial of your position as the price goes in your favor.

You’re long 1000 Apple Shares at $100… and you sell 500 shares at $150, and another 500 shares at $200.

Here’s the thing…

There are different ways to scale out your trades, and different traders have a different approach to it.

The most common techniques are scaling out once a specific risk to reward is met, or at Support & resistance.

Pros of scaling out your trades:

  • More consistent equity curve
  • Easier on your psychology as profits are “locked in”

Cons of scaling out your trades:

  • Lower profitability as position size is reduced when the price moves in your favor

2. Scaling in your trades

This means you’re adding positions as the price goes in your favor.

You’re long 1000 Apple Shares at $100… and you long another 500 shares at $150, and another 500 shares at $200.

There are different ways to scale in your trades, and different traders have a different approach to it.

The most common techniques are scaling in on pullbacks, or breakouts.

Pros of scaling in your trades:

  • Huge profit potential in strong trending markets

Cons of scaling in your trades:

  • Harder to manage psychologically
  • More volatile equity curve

Here’s the thing:

There’s no right or wrong way in trade management. Some traders prefer to scale in their trades, some prefer to scale out, and some do a combination of both.

Ultimately, you need to find something that you’re comfortable executing consistently over time.

Trading checklist — #8 Are you following your trading plan?

This is important.

If you’re not following your trading plan, then it’s impossible to find success in trading.

Because you will:

  • have no idea why you’re winning
  • have no idea why you’re losing
  • have no idea how to improve your trading
  • be fooled by randomness

To put it straight… you’re gambling.

Now you’re probably wondering:

How do I develop a trading plan?

Just answer these 7 questions…

What is your time frame?
You must define the time frames you’re trading. If you’re a swing trader, then you’ll probably be trading the 4 hour or daily time frames.

What markets are you trading?
You need to state which markets you’ll be trading. It could be equities, forex, futures etc.

How much are you risking on each trade?
This boils down to risk management. You must know how much you’re prepared to lose on a single trade. For starters, I would suggest no more than 1%. This means if you have a $10,000 account, you cannot lose more than $100 on each trade.

What are the conditions of your trading setup?
You need to know the requirements of your trading setup. Whether you’ll trade with the trend, within a range, or both (For starters I would suggest trading with the trend).

How will you enter your trade?
You could enter on a pullback or breakout. Will it be a limit, stop or market order?

Where is your stop loss?
No professional trader would enter a trade without a stop loss. The first thing you need to ask yourself is, “where will I get out if I’m wrong?”

Where is your profit target?
And if the price moves in your favor, you need to know where to take your profits.

Now what I’d love to hear from you is this…

What are some of the things you look out for before putting on a trade?

Leave a comment below and let me know what you think.

Do you want to learn a new trading strategy that allows you to profit in bull and bear markets?

In The Ultimate Guide to Trend Following, I will teach you this powerful trading strategy step by step, along with charts and examples.

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