A trading checklist is a document that outlines all the steps that need to be taken when trading securities. It can be used as a guide to help traders stay on track and make sure they are following best practices.
There is one of the major differences between good traders and great traders. Good traders find a strategy or technique that works, then keep doing it until it doesn’t work anymore. Great traders evolve constantly throughout their entire careers by experimenting with different strategies and using market data to refine them into something even better.
Trading is not just about being right on your trades; it’s also about avoiding big losses when you are wrong. And that starts with having an organized plan in place for what you will do when things don’t go according to your expectations. The most common place where traders go wrong is when they ignore their plan and let emotions take over instead. That’s when they start making impulsive decisions in the heat of the moment and end up losing a lot more than if they had just stuck to the plan in the first place.
The best traders I know don’t just trade. They prepare for it, too. They have checklists they go through before every trade to make sure they are taking the smartest action possible. The checklist should include all the steps necessary to complete a trade, from finding the right security to placing the order and monitoring the position. It should also list any restrictions or rules that need to be followed, such as investment limits.
A trading checklist can help traders stay organized and make sure they don’t miss any important steps. It can also help prevent mistakes by ensuring that all the necessary procedures are followed. Having a trading checklist can be especially helpful for new traders who are still learning the ropes and need a reference guide to make sure they don’t miss anything.
A trading checklist can be customized for any particular business or platform. It might be helpful to have different checklists for different types of securities, such as stocks, bonds, and options. It may also be helpful to have different checklists for day traders, position traders, and algorithmic traders. A complete list of steps will require several pages in some cases.
The first section of the checklist should include all the items related to finding the right security to trade. Traders should start by defining their investment strategy on paper or using an online tool that helps define risk parameters, asset allocation, and suggested investments. This section should also include research on companies that meet those criteria, comparing fundamentals and evaluating technical data. Finally, this section should include all the steps necessary to place the trade, such as selecting a broker and placing an order.
The second section of a trading checklist should cover post-trade considerations. This includes reviewing the execution to make sure it was done properly and on time, checking for any news related to the company or its competitors that might affect price, monitoring how market factors could affect future earnings, and maintaining records on targeted companies.
The last section of a trading checklist should cover general best practices. These may include how often traders should evaluate their positions when they should use margin, which types of securities require special permissions from management, and what types of risks should always be considered.
A fully completed trading checklist should list all the steps necessary to complete a trade, including things that can affect price and risks related to holding the position. A good checklist will reduce the chances of mistakes or oversights while increasing accountability for traders. Some important things you need to ask yourself before placing a trade are listed below:
What is my market view?
At any given time, there are only two possible opinions you can have about any market: bullish or bearish. But not all bulls and bears are created equal — some believe we will see higher prices, others believe we will see lower prices — so you need to be crystal clear about which one you are.
How much Capital Am I Risking?
It is very important to have clear idea about risk management and money management before placing a trade. If you are new in trading and start to risking 30% or 50% of your capital, you can blow up your account after few trades if they go against you. As there is no guaranty of winning every trade, so it will not be a wise idea to risk very high percentage of your capital in one single trade. If you risk 2% or 3% of your capital in every trade, your capital will not vanish quickly.
Risking a fixed percentage of your capital in every trade is also necessary. If you are risking 2% of your capital and win 5 trades, it will increase your capital. But in 6th trade, if you thought I’m winning every trade so why not take 10% risk and increase my capital quickly and took that trade risking 10% and if it goes against you, it will swipe out all the profit you earned by winning those 5 trades. So, try to risk a fixed percentage of your capital in every trade.
Any Strong Support or Resistance Line Nearby?
Before placing a trade, you must check if there is any strong support or resistance line because most of the time when price faces a historic strong support or resistance, price reacts accordingly. For example, if you bought a share of a company in which there is a strong resistance near your entry zone. There is a high probability of reversal or a long retracement of the price from that resistance zone. So as a trader you don’t want to face this type of situation after buying a share.
What is my risk reward ratio?
You must have a good trading strategy with high risk reward ratio. If you follow a strategy with 1:2 risk reward ratio and you just win 50% of your trades, you still will be on profit at the end of the month. After finding a suitable trading strategy with high risk reward ratio, before taking an entry you must be sure if the trade can maintain that risk reward ratio. If you risking too much of your capital for small profit only, it will harm your capital and you will be in net loss at the end of the month or year.
What will be my exit strategy?
As a trader, you need to have a clear set of rules for your exit strategy. Without a proper exit strategy, you have to hesitate much after placing the trade. You will find many people in different trading groups or forums, asking other people when to sell their shares of a company. How can an outsider help you who don’t even know your trading strategy? So before placing a trade, have a clear idea about your take profit or exit strategy.
Is the market trending or in a trading range?
Trading in a sideway or ranging market is not that worthy because here price moves in a range and there is no significant higher high & higher low forming to give you more profit. So it is always better to trade in a trending market which can give you maximum profit. Another key thing to remember, you shouldn’t place a trade against the major trend unless you are scalping. For example, you find a stock creating some higher highs and higher lows in 15 Minute timeframe, got excited and bought that share without checking other higher timeframes, this trade will go against you if this minor uptrend was a retracement of a major downtrend. So, if you find an uptrend in 15-minute chart, watch 1 hour, 4 hour and daily chart too. If they are aligning with each other suggesting the uptrend, you can buy this share if you find a good buying opportunity.
A trading checklist is what you need to be able to work through the most important aspects of your trading strategy. If you are not 100% confident in how well developed your trading plan is, start by creating a simple trading checklist that covers these key areas. It is very important to have a trading checklist. If you don’t, it’s like going on a road trip without your GPS! You might get around ok but eventually you will lose time and money.