I’d like to share with you a funny personal story and how it ultimately relates to trading the markets: You see, my Dad isn’t tech-savvy in the least, and so taped to most of his tech gadgets are small, handwritten notes, each one listing steps required to turn them on and operate them properly.
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!
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:
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.
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.
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.