Things to Check Before Every Trade

checklist before taking a trade
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Losing trades can't be eliminated, but they can be reduced if you implement a checklist before every trade. Day traders and investors alike, run through this checklist so you only take high-quality trades. Once you know your checklist it only takes a second to run through it, so even active traders can implement a trading checklist. 

Run through the following five-point checklist before every trade.

Tweak it to accommodate your own trading style. 

1. Am I centered and focused? Be thinking clearly before you take a trade. Being frazzled, tired, angry, or sad affects your judgment. For example, when angry you may convince yourself there is a trade, when really there isn't, because you want to inflict pain on the market or other traders (that doesn't work of course). Are you focused and calm? Then proceed. If not, there will be other trades. Trade when you are calm and focused.

2. Is my trade setup present? No matter what strategy you use certain factors must align in order to produce a trade. Your trade setup may be a specific indicator reading or a pattern that forms under certain market conditions. The trade setup is a precursor to the trade trigger. It is the trade trigger that tells you now is the time to act. Make sure you are considering a trade with a valid setup. If it is, proceed if the trade is triggered.

If it isn't a valid trade setup, wait for one.

3. Everything is looking good for taking a trade, so finalize where your stop loss, entry, and targets will go. Are these levels reasonable given the market conditions? If you usually use a 5 pip stop loss with your forex day trading strategy, but today is more volatile than normal, you may need to adjust your stop loss for the conditions.

Give your orders a final check before taking a trade. The potential reward on the trade should outweigh the risk; if the setup and conditions say that it does, proceed. If not, money saved is better than money gambled.

Point three may seem like a few items, as we're checking all our orders and assessing the risk/reward of the trade. But most of this is thought about throughout the day as you are planning ahead based on changing market conditions. By the time a trade comes around you know where your orders will be, so all you really need to do is take a final look at the trade and make sure the potential reward warrants the risk.

4. Is your position size correct? Position size is key for controlling risk, and also making sure the trade is worth your time and effort. With everything about the trade confirmed, make sure your position size is correct. Typically the correct position size puts 1% (or less) of your capital at risk, based on the difference between your entry price and stop loss price. An oversight on position size can result in catastrophe--a "fat finger" mistake, such as adding an accidental zero onto a position size, can wipe out an account in a hurry.

5. What will you do after you are in the trade?

When you take a trade it's important to reiterate your overall plan for the trade. How will you manage it once the trade is underway? Some traders let the trade hit their stop loss or target with no interference. If this is the plan, state it when you take the trade. Restating the plan for each trade helps with the follow through of the plan. If you plan to alter stop loss levels or targets during the trade, state exactly how you will do that before taking the trade. If you don't have a plan for after the trade is taken, you shouldn't be in it in the first place.

Trading Checklist - Final Word

The checklist makes sure you're in the right frame of mind for trading, that you're trading valid high-quality trade setups and that you're engaged in the trading process. After many trades, it's easy to become sloppy, gloss over details or not give the market the respect it deserves.

Get in the habit of going through the checklist. It only takes a second once you know it well. Don't go through it because you have to, though...go through it because it will make you a better trader.