The idea of a checklist for traders is not a new one. Prior to the advanced computer age, professional bank traders pored over reams of documents, manuals and notes from bank research departments each day. Within many of these writings, included subtle and not so subtle hints and trading ideas-more often they were reminders-of how traders should conduct themselves throughout upcoming trading sessions. Many institutional traders today have continued the tradition, though checklists are likely to be less formal, and more incorporated into briefings or electronic formats. Indeed, market over views are vitally important for traders, particularly those trading the New York session whom-to use a baseball term-are batting “cleanup” after the other traders have been at bat (Europe and Asia).
Checklists prevent errors and increase winning percentages. Many of the most experienced and profitable traders understand that deviations from well thought out plans and strategies are some of the main reasons behinds bad trade entries, exits and extended trading slumps. A checklist is a mental reminder of what is important, and a way of keeping traders on the course that he or she has already prepared for themselves:
- BEFORE you start trading. This is critical. Although going through the same routine every day can seem as boring as the preflight announcements flight attendants routinely give passengers before takeoff, they are vital for the list to affect behavior. Often, it’s the little things that make or break traders and better to be a little bored for five minutes each day, then to lose big money. Items on the list of pros often include whom is in control of market...bulls or bears? Is the market ranging? Are there upcoming news events that could affect sentiment? Will my risk position be altered by events? The idea is to focus on the salient facts most likely to change a trader’s actions during each upcoming day or period. A checklist is a short term trading plan.
- Keeps you safe. Some traders have two checklists incorporated into one. One part or section is normally related to the technical aspects of trading, setups, market conditions, divergences, etc. The other is the equally important psychological factors and is akin to a self-evaluation, designed to gauge the state of the trader. Traders not only need to ascertain whether markets are in “irrational” states, but if they might be as well....or in an agitated one. A checklist that reminds the trader about previous actions & losses, and suggests a trading remedy such as stopping four hours after four losses in a row, could keep traders from amplifying mistakes made in previous trading sessions. The checklist acts as a stop loss on detours from trading strategies.
- On your desktop, laptop and/or phone. Many traders will keep a running log of their trades, thoughts, conditions, and how to improve their trading...in spreadsheet form, or as notes on their smartphones. The “how” is more important than the “where,” and the ability to access and use it on a daily basis (or whenever a trader expects to trade), is even more important. If the trader comes away from a pre-trade review with only 50% retention, they will accomplish a lot. The pre-trade checklist usually contains a section about market evaluation based upon historical price action. A New York trader whom is focused on the EUR/USD will without doubt, want to have some pre-market analysis regarding market sentiment, upcoming news, and a review of trends and/or previous and current positions. Other aspects can include where price action is relative to key support and resistance levels, as well as how many times prices have made an “assault” on those levels during prior trading sessions. This can cue traders looking for breakouts and immunizes them against false breakouts to some degree.
- Price action. Ideally, the trader’s checklist will include a review section (short and sweet) of where markets had been going and the odds or probabilities of future direction and/or continuation of trends. A checklist that spells out in detail exactly what conditions will precipitate an entry (or an exit on an open trade) could help traders let profits run longer, or cut losses quicker.
- Post trade checklist. It’s normal after good or bad trading session, to want to walk away and either sulk or celebrate. Actually, a post game self briefing is one of the ways to recirculate good ideas and habits, and to shoot down bad ones before they become too ingrained. It can also relieve stress by putting the emphasis on the mechanics of the trade. Post trade checklists are great for highlighting future actions and planning the next trade setups. Indeed, one component should be a watch list for potential setups on currency pairs.