For each strategy you trade, have a pre-trade checklist. Before placing your orders, go over the checklist to make sure that the trade meets your strategy guidelines. It is a quick spot-check to make sure you’re allocating your money to a good cause.
Your strategy guidelines are laid out in your trading plan. So the checklist is a summarized version of your strategy.
I recommend that traders utilize four “documents” for their trading:
- A trading plan which outlines how, when, and why you trade.
- A daily routine that helps us implement our plan through daily consistency.
- A pre-trade routine that gets us in the proper mind frame for trading.
- A pre-trade checklist or cheat sheet that we can refer to while trading to help us follow our trading plan. This is the focus of this article.
Here is a one-page summary outlining how to make and implement a trading checklist. More details are provided below, as well as checklist examples.
Example Pre-Trade Checklist for Swing Trading Contraction Patterns in Stocks
Contraction patterns are one of my favorite swing trading setups for stocks.
This is my checklist, which is focused on things I want to remember before I take a trade. You may need to remember different things, such as checking position size, or that your stop loss is in the right place, etc. Therefore, this is just an example. The checklist is the bullet-point items. I have added a few comments below each one to help you understand why I chose these particular items.
- Stock is on my scan list?
This helps avoid taking random trades or trading based on “tips”. If the stock doesn’t fit certain criteria, I don’t want to trade it.
- Market Health Indicators say ok to trade?
I only want to only take long trades when the market is healthy. If conditions or choppy or the stock market is plummeting, I will day trade or consider short trades. I won’t be buying stocks.
- Contraction following strong uptrend (not chop)?
Uptrend, contraction, that’s the strategy. If the price has been chopping sideways for 2 years and just happens to form a contraction pattern within that chop, that’s not the strategy.
- Contraction size is the same or smaller than prior contractions?
If a contraction is too large relative to surrounding price action, it often signals a reversal to the downside or an extended period of sideways movement is forthcoming.
- Down wave 2 drops to near the upward turning point of down wave 1?
This helps avoid “seeing what you want to see”. The waves must meet certain parameters. If down wave 2 is really tiny compared to down wave 1, the pattern is usually incomplete and needs more time. Wave 2 down still has to form.
- Contraction longer than 1 month (from first wave peak)?
Short-term patterns can be great, but I have found they don’t work great for this particular strategy. The price needs at least a month to coil up, often 2 or 3 months, for a nice strong move upon breakout.
- Historic price moves indicate at least 3:1 reward:risk potential (with room to spare)?
I don’t want to assume I’m in a great trade. I want the average moves of the stock to determine what the profit potential is.
- No earnings within a week of entry? If slower mover, 2+ weeks?
I don’t hold through earnings. The trade needs enough time to work and potentially hit the target before I close it the day before earnings.
- 3 day+ consolidation, or 2 day+ with false downside breakout?
I need a valid trigger to initiate the trade.
- Top quality pattern? (not just now, but based on ALL prior trades taken)
It’s not about just taking the best pattern that is out there right now, because they all could be crap. I want my capital to go into the best possible setups. If I have to wait, I wait.
- Am I in the right mind frame to do this analysis and place this trade?
Did I do my pre-trade routine before analyzing these trades and placing these orders? Am I calm? And not over-eager, jacked-up, over-confident, anxious, etc?
That’s the checklist
The questions need to be answered Yes/Correct in order to take the trade.
This is not an exhaustive list of all the criteria for the strategy. It is just the ones that I like/need to remind myself of. You may forget or miss other things, so you may opt to include those things instead.
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Example of a EURUSD Rounded Top/Bottom Pattern
RTs and RBs are exceptional patterns/strategies that work on the EURUSD 1-minute chart. The strategy is covered in-depth in the EURUSD Day Trading Course. And check out the quick summary version on this Twitter thread I wrote.
The checklist below is not exhaustive of all the components of the strategy. It’s the elements that I like to remind myself of. You may need to be reminded of other elements (where you commonly make mistakes), and thus you would create your own checklist.
When trading a 1-minute chart, we don’t have time to physically check off a bunch of items. If day trading, memorize your list. As the pattern is forming, mentally check off each item. Even though you have it memorized, have it written beside you while you trade. Read them every so often while trading to remind yourself what you’re looking for.
If the price is barely moving the last couple hours, I’m not trading. I don’t assume it will start moving more. If it does, then I can trade.
- Slowing into high(RT)/low(RB)?
The point of the pattern is that the trend slows and reverses. Without the slowing, the reversal is more questionable, even if it does happen.
- Strong reversal?
If the price chops its ways to a reversal, the move has less conviction than a strong swift move.
- Trade trigger within or very close to the existing pattern?
If the trade trigger occurs far away from the rest of the pattern, the move I wanted to be in has already happened. The opportunity is gone; the trade didn’t set up. Await another opportunity, such as a TC (another pattern covered in the course).
- Clean waves?
Ideally, the pattern is composed of rhythmic waves. If the movements within each wave are choppy, then there will likely be multiple triggers and it’s harder to decide which to take. Avoid chop.
The pattern is composed of actual price waves. Not just some sideways candles that happen to make a tiny mountain shape.
- Are people screwed?
The best trades are when people need to flood out of their existing positions which pushes the price in our expected direction. If the price has been chopping around, no one probably cares about the RT or RB. They aren’t hurting. After a nice trending move, or after a false breakout of support or resistance, if that RB or RT forms, plenty of people will need to get out.
- Small trigger candle/stop loss for the price movement?
If the SL is too big, it’s not worth taking. There should be enough movement that the target, which is a multiple of the stop loss, can be easily hit.
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Example of Checklist for Swing Trading Forex Price Structures
Here is the short-term form checklist for trading forex price structures. What each of these means is discussed in more detail below. I wrote this section a number of years ago.
For more details on trading price structures, mainly Channels using a regression (draws our channel automatically) then check out the Forex Swing Trading Course.
1) Lines drawn and accurate according to rules?
2) Price near structure edge on the hourly daily or weekly chart?
3) Price is weakening, slowing, consolidating, or has a false breakout near the structure edge?
4) Target is reasonable (near the other side of the structure) as price has been moving rhythmically between the channel high and low?
5) Reward-to-Risk greater than 3:1?
6) 1% risk or less (position size)?
7) Won’t over-correlate me with other positions?
8) What trailing stop loss method will I use, if any? (state method, and how it will be implemented)
9) Checked the economic calendar for events that could occur during the trade?
The questions need to be answered Yes/Correct in order to take the trade.
This checklist is designed only for trading forex price structures and may not applicable to other strategies or markets. Have a checklist for each market and time frame you trade.
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By Cory Mitchell, CMT
Disclaimer: Nothing in this article is personal investment advice, or advice to buy or sell anything. Trading is risky and can result in substantial losses, even more than deposited if using leverage.
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