What’s on Your Pre-Trade Checklist?

His computer, DVD player, surround sound system, and more, all have lists on them that he follows exactly, for my Dad loosely believes that one wrong button or keystroke on any or all of them will send out a death signal and destroy the entire universe!

What's also funny, though, is that I have a pre-trade checklist on my desk that I take almost as seriously. That's because a pre-trade checklist makes a great reference point that, even in the heat of trading, can keep you focused and on track, often providing validation in those few seconds before you hit the "Buy/Sell" button, when many traders also tend to feel like the fate of the universe is hanging on the outcome of their next move!

So today we examine the importance of a pre-trade checklist and how to create one that's unique and ideally suited to you, because trades have real consequences, and alleviating mistakes—especially before they happen—is a great way to promote consistency and improve performance…not to mention have more fun trading!

How to Establish Your Pre-Trade Checklist…

Creating a broader trading strategy requires painstaking research, backtesting, and trial and error to clearly define your "edge," and the markets, set-ups, and time frames you'll trade in order to exploit it. A pre-trade checklist, however, is more "in the moment," laying out shorter, more clear-cut conditions that must always be aligned before you'll enter into any trade. To create your pre-trade checklist, think about when and how you trade your best, your common pitfalls, and the facets of your trading that you know—or at least believe—are most important to your success, and lay them out in order. For example:

• Quality of set-up: Does the trade meet all of the technical/fundamental conditions required by my strategy?
• Reward/risk: Does the potential reward exceed risk by at least the minimum amount allowed by my strategy? Ex. 2:1, 3:1, etc.
• Capital: Am I risking no more than 1% of total account capital?
• Stop-loss: Have I placed a hard stop at a logical level where I am comfortable?
• State of mind: Am I taking this trade with a clear mind and full conviction?

If the answer to each question on your pre-trade checklist is a resounding "Yes," then you're ready to take the trade; and if not, then something is wrong and it requires further consideration…or perhaps not taking that trade. In total, though, it should take only one minute or less to assess a trade according to your pre-trade checklist, and whenever everything is aligned, it's much easier to move ahead with quick, confident execution. Remember candlestick patterns can give an idea as to where the trend is heading.

And Use it for Maximum Efficiency with Every Trade!

Once created and put into place, a pre-trade checklist should become a central part of each trading day. It is helpful in promoting accountability, overcoming the effects of solitude, and developing stronger discipline. It can have an immediate positive impact. You have to create a sense of importance so that no trade can go on without it. Below we have given you some detailed ways of ensuring this happens.

• Make it visible: Write out your pre-trade checklist using bold letters and affix to your monitor so it's right there at eye level at all times. Refer to it often, and use it routinely with each trade.
• Answer the questions out loud: Read off the conditions on your pre-trade checklist as you evaluate a trade(s), and answer as if it's an interview and peers, the press, or an imaginary board of directors is there before you.
• Use it to journal your trades: You can also use your pre-trade checklist as a starting point when you document trades in your trade journal. Simply look to expand upon each of the parameters to include additional details like the date, time, the chart pattern and/or nature of the set-up, and any news or data points impacting the trade.

Conclusion

In our day-to-day lives, we rely on checklists all the time: grocery lists, kids' school supplies, or maybe the unique set of things we all do each time before driving our cars. And likewise, a pre-trade checklist is equally helpful for ensuring consistency, increasing preparedness, and often, just making trading a bit easier.

It's funny how short lists have the power to guide the activities we depend on each day, and it goes to show that even complex activities like trading can be broken down into simple, easy-to-follow steps. So count on your pre-trade checklist, use it each day, and don't take another trade without ensuring it meets all the conditions you set forth as being most important. In very short order, you could start seeing improved execution, reduced stress, and better overall performance, simply by devoting this one minute or less to validating each trade before you take it.