A Trader’s Checklist before the Trade

 

If you are just randomly trading what you like with no real underlying system, method or planning then unfortunately your odds of success in the long term are slim. Trading a winning methodology is what creates an edge in trading.

Consistently trading a robust system or methodology enables you to trade in a way that historically wins, controls risk, and does not bring your ego and your emotions into your trading in a destructive way.

Ten questions to ask yourself before every trade:

  1. Does this trade fit my chosen trading style? Whether it is:  swing trading, momentum, break out, trend following, reversion to the mean, or day trading?
  2. How big of a position do I want to trade? How much capital am I going to risk? Am I limiting my risk to 1% or 2% of my trading capital?
  3. What is my risk of ruin based on my capital at risk?
  4. Why am I entering the trade here? What is the trigger to trade?
  5. How will I exit with a profit? A price target or trailing stop?
  6. At what price will I know that I was wrong? Where is my stop loss based on the position size?
  7. Will I be able to admit I was wrong and exit the trade if my stop is hit, or will my ego make me hold and hope?
  8. Is the risk small enough that I can emotionally handle the loss without blaming the market?
  9. Can I really risk this money or do I need it for upcoming bills? Trade with risk capital not living expenses.
  10. Am I committed to staying disciplined and following my trading plan on the trade?

I believe the answers to these questions will determine your success in any trade more than anything else.