Ask Yourself These Questions Before Taking Your Next Trade
A pilot goes through an extensive pre-flight checklist to avoid any problems once that airplane gets airborne. Similarly, you must go through a trading checklist before you get ‘airborne’ and enter a live trade.
But, how often do you sit down in front of your computer, open your trading platform and begin searching for trades without going through any type of checklist to make sure you’re doing things right? For most traders, this is how they operate all the time and it’s a big reason they don’t make money.
Trading plans or checklists may seem boring to you, but if they do it’s because you aren’t thinking about them right, in fact, when you start viewing them as ‘cheat-sheets’ that can actually make you a more profitable trader, you will start looking at them from a different perspective.
A trading plan / checklist will act as a filter which you put your predetermined trading criteria in and that will act as not only a trade setup filter, but also as a trading mistake filter. We all need a trading plan to stay on track and to stay grounded – I still use a mental checklist everyday before looking at the charts. However, when beginning, you need to print this out or write it down and physically go through it each time you scan for trades, until you have made it a HABIT!
Today on this article we will be discussing some of the questions i ask myself before executing a trade. You are welcome to use this as a foundation / example checklist for you to begin building yours from…
Am I In The Right State Of Mind To Enter This Trade
Are you in a calm, collected and overall objective state of mind before you enter this trade? Did you enter this trade for the right reasons or is it a revenge or greed-fueled trade? You will have to be honest with yourself here obviously, and you will have to act on that honesty, otherwise it’s a waste of time. Remember, you are delving into the trading world where there is no boss, no one is looking over your shoulder to keep you accountable. You must do the right thing when no one else is looking – trading is perhaps the ultimate test of one’s character!
Some other things to consider are: Did you just come off a big winning trade that may be inflating your confidence in your trading abilities to an unsafe level? Traders often lose money because they get overly confident and this causes them to take bigger / more risks in the market. Remember, you’re only as good as your last trade, so stay focused and remain in the proper trading mindset or your last trade might negatively impact your next one.
2. Am I Mentally And Financially Prepared To Accept This Risk?
Ask yourself before entering a trade, are you mentally prepared for the results of the trade, win or lose? This is where trading education great Mark Douglas shines, he gets in-depth into the psychology of trading and really hammers-home the point that every trade’s outcome is essentially random, a 50/50 shot, and that is how you need to view it. However, that doesn’t mean that overtime, over a SERIES OF TRADES your edge is only 50/50. It means that there is a random distribution of wins and losses for any given trading edge. So, you could have 20 losses in a row followed by 40 winners in a row (rare, but possible). However, that is a 66.6%-win rate over the series of 60 trades. But, most traders cannot mentally withstand even a few losses in a row, let alone 20, do you catch my drift here?
You must remember that any one trade, looked at in a vacuum / apart from the rest, simply doesn’t matter. As a result, you need to think and behave in agreement this fact. Meaning, if you are analyzing your trading performance, you cannot care AT ALL about any one trade, it is the overall results, the series of many trades that proves your performance. It will do you a WORLD OF GOOD to remember these points every time you’re about to enter that next trade. Remember, you must let your trading edge play out sans interference on your part, otherwise you cannot properly gauge its performance over-time as a trading approach.
3. Did I Position Size My Trade Correctly?
Did you apply the correct position size to the trade? Position sizing means adjusting the number of lots (your position size) to meet your pre-determined 1R risk amount per trade whilst considering your stop loss placement, which we will talk about next. Always determine stop loss placement before position size. You risk per trade should stay the same. You find the best stop loss placement to give the trade a good chance of working out (don’t put stops too close) and then you adjust your position size to meet your 1R risk.
4. Is The Risk To Reward Realistic?
Is the risk reward ratio realistic? Meaning, is there a logical profit target available relative to nearby key chart levels that allows you to get a 2 to 1 winner or more? You need to make sure that your stop loss and profit target both make sense in the context of the surrounding market structure.
5. Do I Have A Plan To Exit This Trade?
Do you have an exit plan for this trade? What is your overall plan to exit this trade for either a win or a loss? Are you planning to exit at a certain horizontal level or are you planning to trail your stop and let the trade run because it’s in a strong trend? Will you move to breakeven at a certain point or just set and forget? These details should be ironed-out before entering the trade. If a dramatic turn of events happens whilst the trade is live (like a huge price action reversal against your position, for example) you can intervene, but in most cases, you want to pre-determine your exit strategy and stick to that no matter what.
6. Does The Trade Fit My Trading Plan
Finally, if you’ve answered all the above questions successfully, then your answer to this last question should be “yes”. Your trading plan can be a checklist like this, although yours will be more detailed, and only if a trade passes each filter should you give it the “OK”. Don’t worry, eventually, the process of going through each filter will become a habit and something you almost don’t even need to think about it. You will intuitively know if a trade passes all your filters and criteria because you will have gone through your checklist / plan manually so many times that it will have seared itself into your brain, it will become part of you.
7. In A Nutshell
We all need guidance 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 via my trading programs and members community, but it’s up to you to put in the ‘hard-work’ and follow-through with what you learn. Today’s lesson is another piece of the trading puzzle; you need to actually make a checklist like this and put it to use in your day-to-day trading and if you do, I guarantee you will see an improvement in your trading. You are going to naturally be more selective and methodical regarding which trades you take and how you trade the market. We have additional confluence and technical analysis specific questions which we include in our trading routine. These however are specific to our trading strategy which is why we have not mentioned them on this blog. You are welcome to join our team and benefit from all the additional tools we use to give us an edge in the market.
Make this trading checklist a part of your daily trading routine and you will wonder how you ever traded without it.
Happy Trading
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