Must have Trading Checklist

One of the worst mistakes beginning traders make is to not pay enough attention to their trade entries. Neglecting the importance of a good entry and exit can make a huge difference to your bottom line. In this chapter you will learn all the do's and don’ts of opening and closing trades. Before we get into the nitty-gritty of actually setting up the best possible trade order, let me first talk about how to set your trades up for success. One of the biggest mistakes that you can make is to not have a clear trading plan. Without a plan you're basically trading blind. To help you always have a trading plan from now on I'm going to present you a step by step checklist that walks you through every aspect to consider before sending any trade order. If you go through all these steps you should never again be in a trade that you don't know what to do with. Let's now go through this trading plan template. First of all I recommend taking a look at upcoming events. Even though this doesn't directly affect your trade looking at future events before opening a trade can save you from unwelcome surprises. Are there any upcoming dividend payments earnings or other upcoming events that might clash with your trade plan? Around these events stocks often behave differently and they normally would. So either be aware of this or avoid trading through these events. Next, define your risk. Never open the trade without knowing your max loss. Way too many traders don't do this even though this is a must for you to be able to manage the risk. Besides defining your risk you should also define your reward. Have a clear profit target that tells you when to take profits. Without a clear profit target it's easy to tell yourself to wait for just a little more. Doing this will lead to winning trades turning into losing ones. After defining your max risk and Max reward is very easy to calculate your risk to reward ratio. So make sure to do exactly that. Actually calculating and seeing your risk reward ratio will give you more insight into the payoff of your trade. A good rule of thumb is that your risk to reward ratio is better than 1 to 2, but note that you should also take the probability of profit into account. It's totally ok that your risk is greater than your reward as long as your probability of profit is high enough. Furthermore, you should also define the time frame of your trade. Is it a day trade, swing trade or long term investment. You don't need to know the exact time that you're going to be in the trade but you should have an estimate of the trades time frame. Inside of your trade plan you should also have a concrete entry plan.

This plan should entail your entry price, position size and how you want to open your trade. Do you want to open the entire position at once or slowly average into it? Lost as important is your exit plan. This should describe how you're going to close your position. This could include possible trade adjustments, your trade exit price and exit trigger. The most obvious exit trigger would be a certain price level. But it certainly isn't limited to that. You could for instance also use a timeframe, probability of profit, certain indicator values or the P&L of your position as an exit trigger. Moreover, your exit plan should include how you're going to close the position. Last but not least, a trade plan could also include other notes such as the motivation behind the trade, your directional assumption, a trade description or something else. Hopefully this template gives you an idea about what a good trading plan could look like. It's very important to create such a trading plan before you open your trade. This allows you to stay rational and clear-headed. As soon as you open your trade, you lose the ability to evaluate the position objectively. Furthermore it's a great idea to actually write down your trading plan. Especially for beginning traders this is a good exercise. With time you will be able to do this in your head, but like everything this requires practice. So even though writing down your plan takes time it will force you to really think about your trade. This is also a great counter against impulsive trades or Gamble's. If you ever again find yourself in the situation that you have no clue what to do with your trade, just take a peek at your trading plan and you will see the answer to this question. After you close a trade you should always ask yourself; did you stick to your trading plan? If you didn't, why not and what could you do better next time? If you did, was it a good plan or how could you improve the plan next time? Asking and answering these questions will allow you to continually improve your trading plans and thereby your trades. A great place to answer these questions is in your trading journal. Having a good trading journal is another great way to evaluate your trades without falling prey to cognitive biases and subjectivity. If you currently do not have a trading journal I highly recommend starting one as soon as possible.