Brilliant Basics - Part 5: Pre-Trade Checklist
Welcome to the fifth and final instalment of our Brilliant Basics series. Here, we provide you with a powerful Pre-Trade Checklist that can be applied to any trading strategy on any timeframe.
Pre-Trade Checklist: A Platform For Success
Our Pre-Trade Checklist involves asking yourself five simple yet crucial questions before committing your hard-earned money to the market. These questions cover the fundamentals of good trading, emphasising psychological discipline, risk management, and trade management.
1. Does your trade REALLY match your entry criteria?
• This may sound obvious, but before entering your trade, it is essential that you triple check if the trade matches your entry criteria. The emotional rollercoaster of trading often starts at the inception of a trade idea. It’s easy to become attached to a trade that doesn’t actually meet your trading plan.
Example: Imagine you’re a momentum trader who has been patiently waiting for a stock to break out from a wedge pattern for weeks. Your trade plan clearly states that you must wait for a close above the breakout zone on the daily chart before entering. On the day the breakout finally occurs, your excitement takes over, and you decide to break your entry criteria "just this once" because the breakout was moving so fast. Regardless of the outcome, the "just this once" mentality will prevent you from achieving consistency in your trading.
Key Takeaway: Good trading hinges on consistently applying your edge across a large dataset. Therefore, ensure your trade strictly aligns with your predefined entry criteria.
2. Have you checked the economic calendar?
• Always check the economic calendar before entering a trade. Scheduled news events like earnings announcements or central bank policy statements can trigger significant volatility. While some strategies may thrive on volatility, effective risk management requires awareness of potential market-moving events.
Example: Suppose you’re trading EUR/USD. Without checking the economic calendar, you might miss an upcoming ECB meeting that could drastically impact the pair’s movement, causing unexpected volatility and potential losses.
Key Takeaway: Serious traders prioritise risk management and should never overlook scheduled economic events that could impact their trades.
3. Where will you exit if you’re wrong?
• Pre-trade enthusiasm often leads to us underweighting the potential to be wrong. If you know exactly where you are getting out of the market if the trade goes wrong, you are already miles ahead of most retail traders.
There are two elements to this question:
A. Stop Placement: This is an essential hard line in the sand and a stop should be placed that allows for market noise and confirms that your initial trade thesis is wrong.
B. Pattern Failure: The second, more subjective element, is failure of pattern or catalyst behind the trade prior to the market hitting the stop.
Example: Imagine you’re a swing trader buying a breakout from a descending channel. You place your stop loss below the nearest swing low. The market breaks higher but then retreats back below the descending channel. The breakout pattern, which was the catalyst behind the trade, has failed, but you’re still in the trade. Do you wait and hope for the trade to turn around before your stop is triggered, or do you take a proactive approach and close the trade on pattern failure?
Key Takeaway: Exiting on pattern failure prior to your stop can help to reduce the size of your average loser and therefore boost your trading edge.
4. Have you adjusted your position size?
• Consistency in position sizing is key to trading success. Adjust your position size according to your risk management strategy—whether fixed monetary amounts per trade or a percentage of your total account size.
Example: Imagine you are a swing trader who risks £100 per trade and places a stop loss below a key swing low. Trade A has a stop loss of 100 points, and Trade B has a stop loss of 50 points. To ensure each trade has consistent monetary risk of £100, you risk £1 per point on Trade A and £2 per point on Trade B.
Key Takeaway: Equal weighting of trades ensures that your edge is applied consistently over time, regardless of market conditions or trade outcomes.
5. Where will you exit if you’re right?
• Planning your exit strategy before entering a trade is crucial for consistent trading performance. Avoid impulsive decisions influenced by profit-induced dopamine rushes.
Example:You’ve entered a short position on Tesla (TSLA) after identifying a bearish head-and-shoulders pattern. You plan to take profits at the next major support level. By setting this target in advance, you avoid the temptation to exit prematurely as the stock begins to fall.
Key Takeaway: Determine your profit-taking strategy—whether exiting at key support/resistance levels, taking partial profits, or trailing stops to capture potential further gains.
Summary:
Before entering a trade ask yourself the following five questions:
1. Does your trade REALLY match your entry criteria?
2. Have you checked the economic calendar?
3. Where will you exit if you’re wrong?
4. Have you adjusted your position size?
5. Where will you exit if you’re right?
These simple questions, if answered honestly and consistently have the potential to make a real positive impact on your trading regardless of you style or experience.
Thank you for following our Brilliant Basics series. We hope these insights have provided you with the tools and confidence to improve your trading strategy. Remember, disciplined trading is the key to long-term success. Happy trading!
Disclaimer: This is for information and learning purposes only. The information provided does not constitute investment advice nor take into account the individual financial circumstances or objectives of any investor. Any information that may be provided relating to past performance is not a reliable indicator of future results or performance. Social media channels are not relevant for UK residents.
Spread bets and CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 80.84% of retail investor accounts lose money when trading spread bets and CFDs with this provider. You should consider whether you understand how spread bets and CFDs work and whether you can afford to take the high risk of losing your money.
Pre-Trade Checklist: A Platform For Success
Our Pre-Trade Checklist involves asking yourself five simple yet crucial questions before committing your hard-earned money to the market. These questions cover the fundamentals of good trading, emphasising psychological discipline, risk management, and trade management.
1. Does your trade REALLY match your entry criteria?
• This may sound obvious, but before entering your trade, it is essential that you triple check if the trade matches your entry criteria. The emotional rollercoaster of trading often starts at the inception of a trade idea. It’s easy to become attached to a trade that doesn’t actually meet your trading plan.
Example: Imagine you’re a momentum trader who has been patiently waiting for a stock to break out from a wedge pattern for weeks. Your trade plan clearly states that you must wait for a close above the breakout zone on the daily chart before entering. On the day the breakout finally occurs, your excitement takes over, and you decide to break your entry criteria "just this once" because the breakout was moving so fast. Regardless of the outcome, the "just this once" mentality will prevent you from achieving consistency in your trading.
Key Takeaway: Good trading hinges on consistently applying your edge across a large dataset. Therefore, ensure your trade strictly aligns with your predefined entry criteria.
2. Have you checked the economic calendar?
• Always check the economic calendar before entering a trade. Scheduled news events like earnings announcements or central bank policy statements can trigger significant volatility. While some strategies may thrive on volatility, effective risk management requires awareness of potential market-moving events.
Example: Suppose you’re trading EUR/USD. Without checking the economic calendar, you might miss an upcoming ECB meeting that could drastically impact the pair’s movement, causing unexpected volatility and potential losses.
Key Takeaway: Serious traders prioritise risk management and should never overlook scheduled economic events that could impact their trades.
3. Where will you exit if you’re wrong?
• Pre-trade enthusiasm often leads to us underweighting the potential to be wrong. If you know exactly where you are getting out of the market if the trade goes wrong, you are already miles ahead of most retail traders.
There are two elements to this question:
A. Stop Placement: This is an essential hard line in the sand and a stop should be placed that allows for market noise and confirms that your initial trade thesis is wrong.
B. Pattern Failure: The second, more subjective element, is failure of pattern or catalyst behind the trade prior to the market hitting the stop.
Example: Imagine you’re a swing trader buying a breakout from a descending channel. You place your stop loss below the nearest swing low. The market breaks higher but then retreats back below the descending channel. The breakout pattern, which was the catalyst behind the trade, has failed, but you’re still in the trade. Do you wait and hope for the trade to turn around before your stop is triggered, or do you take a proactive approach and close the trade on pattern failure?
Key Takeaway: Exiting on pattern failure prior to your stop can help to reduce the size of your average loser and therefore boost your trading edge.
4. Have you adjusted your position size?
• Consistency in position sizing is key to trading success. Adjust your position size according to your risk management strategy—whether fixed monetary amounts per trade or a percentage of your total account size.
Example: Imagine you are a swing trader who risks £100 per trade and places a stop loss below a key swing low. Trade A has a stop loss of 100 points, and Trade B has a stop loss of 50 points. To ensure each trade has consistent monetary risk of £100, you risk £1 per point on Trade A and £2 per point on Trade B.
Key Takeaway: Equal weighting of trades ensures that your edge is applied consistently over time, regardless of market conditions or trade outcomes.
5. Where will you exit if you’re right?
• Planning your exit strategy before entering a trade is crucial for consistent trading performance. Avoid impulsive decisions influenced by profit-induced dopamine rushes.
Example:You’ve entered a short position on Tesla (TSLA) after identifying a bearish head-and-shoulders pattern. You plan to take profits at the next major support level. By setting this target in advance, you avoid the temptation to exit prematurely as the stock begins to fall.
Key Takeaway: Determine your profit-taking strategy—whether exiting at key support/resistance levels, taking partial profits, or trailing stops to capture potential further gains.
Summary:
Before entering a trade ask yourself the following five questions:
1. Does your trade REALLY match your entry criteria?
2. Have you checked the economic calendar?
3. Where will you exit if you’re wrong?
4. Have you adjusted your position size?
5. Where will you exit if you’re right?
These simple questions, if answered honestly and consistently have the potential to make a real positive impact on your trading regardless of you style or experience.
Thank you for following our Brilliant Basics series. We hope these insights have provided you with the tools and confidence to improve your trading strategy. Remember, disciplined trading is the key to long-term success. Happy trading!
Disclaimer: This is for information and learning purposes only. The information provided does not constitute investment advice nor take into account the individual financial circumstances or objectives of any investor. Any information that may be provided relating to past performance is not a reliable indicator of future results or performance. Social media channels are not relevant for UK residents.
Spread bets and CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 80.84% of retail investor accounts lose money when trading spread bets and CFDs with this provider. You should consider whether you understand how spread bets and CFDs work and whether you can afford to take the high risk of losing your money.
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