How to Build Your Trading Checklist

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Trader – self-discipline: trade entry checklist

A trader is someone who gets involved in financial markets to make money. Some believe that in order to trade profitably, you need to get your hands on some magical trading strategy, that there is some sort of Holy Grail out there, after finding which the trader can forget about losses for good and make consistent profit.

Contents:

Being trader is not about finding the holy grail

Experienced stock traders know that being a successful trader implies having strong self-discipline.

A lot of people cringe and think of something rather unpleasant when they hear this word. However, when it comes to trading, self-discipline is linked to profit, since only a disciplined trader will be able to earn consistently. And you have to admit – it’s really nice to have a hefty amount of money in your account.

A clear trading plan that factors in every little detail helps to stay disciplined and not let emotions take over you. When you have a checklist in front of you allowing you to decide whether or not to enter a position, it becomes much easier to remain disciplined.

Trading plan is trader’s law

So, what exactly is the trading plan? Essentially, it is a list of rules that help decide whether to enter the position or stay out of the market. From a practical standpoint, the handiest option is the trading plan arranged in the form of a checklist with a list of questions to be answered before you open a position.

Traders can create such checklists on their own based on the trading strategy they use and risk management rules. By reading this article, you can familiarize yourself with a similar checklist designed for those who trade technical levels.

Things you should know about the creation of a checklist

1. Where is the price in relation to the technical level?

A profitable trader is the one who sticks to the strategy and doesn’t trade chaotically.

When opening a chart of a trading instrument, the trader needs to evaluate the price position in relation to the nearest levels. When the price approaches the level, there are two possible scenarios – either a breakout of the level or a bounce-off.

If we are dealing with support, it is important to assess the likelihood of the upward bounce and the opening of a long position. In case the level of strong resistance is approached, the quotes will most likely bounce downwards. If the price is in the middle of the range, we should wait.

At this stage, we have outlined possible scenarios and will be trading based on them.

2. How does the price behave when approaching a level?

Let’s assume that the price has approached the level of support. Depending on the quote behavior, there can be different scenarios here. If the price is only approaching the level, it can either break it out or bounce off it upwards.

It’s way too early to make any trading decisions, and we have to wait for the situation to become clearer. If the price starts consolidating at the level, forming a horizontal trend (the base), or bounces upwards (which is called confirmation of the support level), we have every reason to get ready to go long.

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3. How strong is this level?

Technical levels on the chart are notable for their strength. E.g. the level of historical highs or lows is quite strong, whereas the level that has been repeatedly “pierced” can be broken out again.

There is a rule:

The rule of thumb states that levels formed on higher time frames are stronger.

So, when the prices approach support level drawn on a weekly chart, especially if the level is located at the long-term lows, it is likely to result in the price bouncing upwards rather than breaking out the level and consolidating below it.

4. How does the level get confirmed and who generates the price movement in the market?

When the price bounces off the level, it serves as its confirmation. Pay attention to whether or not the level has already been confirmed by bounces. If there are false breakouts, especially by shadows, this also indicates that the analyzed horizontal line on the chart is strong and can stop the price.

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5. How many times did the price tested the level?

The trader is a person who should assess market probabilities. This is why traders use another trick to assess the strength of the level.

If the analyzed horizontal line stopped the price more than three times, the likelihood of level breakout increases with each subsequent approach to the level.

6. Have there been any false breakouts of the level?

As previously mentioned, some types of false breakouts confirm the strength of the level. That being said, the traders should also factor in the levels of false breakouts in order to place a stop loss accurately, assess the risk and decide whether or not to enter the trade based on the parameters of their own money management system.

7. What is the possible risk?

In the previous item, you have already evaluated false breakouts. Typically, you should place your stop loss behind them.

After calculating the stop loss in pips, you need to evaluate the volume you are going to enter with so that the risk in money terms does not exceed about 1% of the deposit. Make sure to add this value to your risk management rules.

If in case of the minimum lot you cannot afford such a risk in the deposit currency, simply skip this trade.

8. How far is the price in relation to strong daily levels?

During the previous stages, you have assessed the position of the price in relation to the levels formed on a 4-hour, 1-hour, or even lower timeframes. What you have to do now is evaluate how close/far the quotes are from strong daily levels, since in case of a breakout, there will likely be a movement to the daily horizontal lines. Keep this in mind when deciding whether to open a position.

9. What is the daily ATR and price movement potential?

Average True Range (ATR) is a technical analysis which measures market volatility by decomposing the entire range of an asset price for that period. It is vital to use it in order not to open the trade when the price has already traveled the biggest portion of the way. It is generally recommended to use a 14-day ATR. It can be determined based on the size of 14 daily candles arranged in a row. For this purpose, we pick the one of the average size and measure its value in pips by a crosshair. We also ignore abnormally large (news) candles.

So, if the price has passed 20% of the daily ATR, the quotes still have the movement potential in order to maintain 1:2 or 1:3 risk-reward ratio in the trade. If most of the ATR is passed, it is not a good idea to open a position.

10. What is the current market trend?

After you have checked all the previous parameters, what you have to do next in order to make an informed decision is figure out the trend. As we all know, trend is our friend. Trading against the trend is dangerous. In case of the uptrend, it makes sense to go long. During the downtrend you should go short. In the presence of the flat market, you can trade in both directions.

So, if you have analyzed all of the items on the checklist and have gotten a solid confirmation for position opening, go for it. However, if there are certain issues and inconsistencies, it is better to skip this entry point. The fact remains that successful trader’s rule of thumb is to first preserve the deposit, and then make money while taking reasonable risks only.

What to know:

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How to Build Your Own Forex Trading Plan

I get a lot of emails from traders regarding Forex trading plans, and from reading these emails I have found that most traders either do not have a trading plan, make their trading plan too complicated, or don’t know how to build one. So, today’s lesson is going to provide you with some insight into exactly why you need a Forex trading plan and then I am going to give you an example trading plan so that you know how to build your own. Let’s get started…

What a trading plan is and why you need one

First, a trading plan should be thought of as a template for trading the markets. Perhaps an even better way to describe a trading plan is that it is a check list. This check list will contain each aspect of making a trade in a logical step by step sequence that acts as your objective guide to trading the markets. In essence, a trading plan will state your overall short and long-term goals as a trader and will provide you with a clear check list of how to achieve them.

Note: Do not think your check-list / trading plan has to be ridiculously long or detailed. After you have mastered an effective trading strategy like price action trading, you will be able to consolidate all aspects of your trading method into concise components. Once you do this you will have created your check list / trading plan that acts as your guide to decide if you should enter a trade or not, your check list can contain words and images and we will see an example of one below.

The reason why you need a Forex trading plan is because you need a way to make sure you do not trade based on emotion. Trading can be an intensely emotional profession, and if you do not follow an objectively constructed trading plan that pre-defines all of your actions in the market, you are almost certainly going to become an emotional trader, also known as a trader who loses money.

Perhaps the most beneficial thing a trading plan does for you is that it keeps you out of second-rate / uncertain trades and uncertain market conditions. This will naturally lessen the amount of losing trades you endure which will improve your overall winning percentage. Many traders end up ‘running and gunning’ in the markets instead of learning to trade Forex like a sniper, and the reason they do this is because they haven’t set aside the time to create their own effective trading plan. I am telling you right now that the fastest route to increasing your profits is to trade with less frequency and with higher quality, a trading plan will naturally aid you in this endeavor, now let’s look at the various components of an effective Forex trading plan:

Components of a Forex trading plan:

These are the necessary components of a Forex trading plan, you can add more if you like, but don’t get too carried away otherwise your plan will become too long and complicated for you to follow. I will give you examples of each of these in the section that follows:

• Begin your trading plan with a positive affirmation that you read aloud

• State your short-term and long-term goals in trading the markets

• Define your trading strategy and all aspects of how you will analyze and trade the markets

• Define your money management strategy, this includes things like risk and reward per trade; what reward is realistic given the market conditions? What dollar amount am I OK with losing per trade? What’s my long-term strategy for withdrawing money from my account…how much money do I want to withdraw each month after I become profitable?

• Miscellaneous components to check: things like, major currency pair, trading time, news events, etc

• Make yourself double-check everything before entering the trade, and ask yourself this question “Is this trade jumping off the chart at me basically telling me I’m stupid if I don’t trade it, or did I have to think about it for an hour and justify the setup by reading 20 different Forex blogs?”

• End your trading plan / check list with another positive affirmation.

An example Forex trading plan:

(Note: this is a hypothetical example, the numbers are arbitrary, but you can use this as a template to make your trading plan. These are not the personal details of my trading plan but do reflect the general layout of my trading plan. You may wish to add other components to your checklist as this is just a general example of what one might look like.)

Forex Trading Plan

• Daily trading affirmation:

“I will never enter a trade without first consulting my trading plan, because my trading plan is what keeps me objective and eliminates emotion from my trading, and that is what will make me consistently profitable over the long-term”

“When I enter a trade, I will not touch the trade or edit the trade, removing all emotions and remaining firm on my initial observations”

” I will never trade over my risk threshold and will stick to my pre-determined $$ risk amounts”

• Trading goals:

Short-term trading goals: To make consistent profits each month and supplement the monthly income from my job. To be a patient and disciplined trader who follows my plan.

Long-term trading goals: To build my trading account up to $25,000 through mastery of my trading strategy, patience, and the discipline to follow my trading plan every time I trade.

To avoid over trading, be patient, remain disciplined and stick to my plan always.

• Forex trading strategy:

This is the process I will use to scan the markets for potential price action trade setups:

1) Analyze the market conditions: is the market trending or consolidating? – You need to first determine what condition the market is in. I teach traders how to identify trending and consolidating markets in my trading course, but, basically you just need to identify the general direction a market is moving and try to trade with that direction. We are looking for higher highs and higher lows in an uptrend and lower highs and lower lows in a downtrend, also, I teach how to use the daily 8 and 21 EMAs to identify near-term market momentum. For consolidating markets we are looking for a market that is consolidating between an obvious support and resistance level. So, in your trading plan you might have a picture like this or similar to remind you of what you generally should look for:

2) Determine the core daily support and resistance levels and draw them on the charts: – After you determine whether the market is trending up, down, or consolidating sideways, you need to draw in the core support and resistance levels on the chart. These are going to be the confluent value areas that you watch for price action strategies to form near to trade back in the direction of the dominant market momentum, or in the case of a consolidating market, towards the opposite boundary of the range.

3) Look for price action signals that have formed at confluent levels in the market, make sure to trade only very obvious and confluent setups: – You have to know exactly what price action strategies you are looking for before you build your trading plan. Below we see an example of a bearish pin bar strategy in a down trending market. You should have images of ‘ideal’ examples of each trade setup you plan to trade within your trading plan, this will help to remind you what high-probability setups should look like.

• Money management:

4) What is the most logical stop placement on the trade setup? What dollar amount am I 100% OK with possibly losing on this trade setup? – Remember, we want to always calculate risk based off dollars, not pips or percentages, to read more about this point, check out my article on measuring risk reward in dollars.

5) What is the most logical exit strategy or reward placement on this trade setup? Is a risk reward of 1:2 or greater logically attainable given the current market conditions and nearby core support and resistance levels?

• Other considerations:

6) What currency pair am I considering trading? Is it a major pair: EURUSD, GBPUSD, AUDUSD, USDJPY, EUJPY, GBPJPY, USDCAD, USDCHF, NZDUSD? (see this article for the best forex pairs to trade)

7) What trading session did this setup form during? Did it form during the European or New York trading sessions which are the most important, or did it form during the quieter Asian session (see this article for the best times to trade Forex)

8) Did I check Nial’s daily members’ market commentary to see if I am analyzing the markets in-line with what he teaches? Also, did I check Nial’s important upcoming economic news to see if an important release like Non-Farm payrolls is about to be released?

• Double-check the trade setup:

9) Make sure you only trade obvious setups – “Is this trade jumping off the chart at me basically telling me I’m stupid if I don’t trade it, or did I have to think about it for an hour and justify the setup by reading 20 different Forex blogs?” – Ask yourself this or a similar question before you hit the buy or sell button

Conclusion:

I hope you now have a better idea of how to build your own Forex trading plan, how it can be structured and what types of components it should contain. There really is not much else I can say to reinforce the notion that creating and using your trading plan will allow you to achieve your goals in the market much quicker than if you don’t have one. You really have to believe me on this and stop trading without a trading plan. You would not start or run any other business without a proper business plan in place, so why do you think you can trade successfully without a proper trading business plan?

Once you put your own trading plan together you must ensure that you actually use and follow it each time you interact with the market, this will work to reinforce positive trading habits like patience and discipline, and it is these habits that will make you money over the long-term. If you have not yet mastered an effective trading strategy like price action to forge your own Forex trading plan from, you should check out my price action Forex trading course and members’ community.

12. Making a Living Trading Forex

If you’re new to trading, you might well wonder if it’s really possible to make a living from currency trading, given that the overwhelming majority of small traders do not.

The short answer?

it’s definitely possible to make a consistent income from Forex trading.

So, what are your chances of becoming a successful Forex trader, and how much can you make?

Let’s jump right in.

The issue with many beginner traders is that they underestimate the level of commitment required to really succeed. They’re not ready to do what it takes to become a real trader.

They don’t spend enough time and energy to develop their patience and discipline, to build a winning attitude with a realistic mindset, or acquire the trading skills and knowledge that will allow them to make consistently profitable trades.

They often give up at the slightest mistake or challenge, or make undisciplined, wild trades which frequently leads them to lose their entire trading capital.

Read:

To be able to build a career as a full-time Forex trader, there are many things you’ll have to do right over the long-term.

Whether you’re a part-time or full-time independent trader, your main goal should primarily be to be a good trader. The money will follow.

For that, you need to act like a professional trader, and create a trading environment and routine that a professional trader would follow.

If you think about it, most professionals follow some kind of a routine, whether that be singers, athletes, or doctors. It helps them maintain a certain level of discipline in their process.

For traders, a routine is useful, because it allows them to follow a certain path when they plan their trades and trade their plans. This minimises positive outcomes and negates trading mistakes.

Don’t worry, creating a trading routine is easy – you just need to remain motivated and committed over time. The most important thing is to develop your own trading routine, one which fits your trading style and daily life.

To achieve that goal and boost your performance while continually progressing, you’ll need to:

  • Honestly assess your understanding of trading, know yourself very well, and recognise the things about yourself that affect your discipline, patience, focus, and follow-through
  • Have sound knowledge of how trading and the currency market work
  • Keep in mind your end goal
  • Create and follow a profitable trading system with a solid risk management (risk-reward ratio, win rate, stop-loss and take-profit orders)
  • Know how to adapt yourself and your trading strategy to changing market conditions over-time
  • Track your progress with a trading journal, and monitor your track-record
  • Develop winning habits and adopt a positive mindset to be able to get over the obstacles of Forex trading, as well as overcome your own unhelpful tendencies (over-trading, trading out of boredom, trading impulsively, and cognitive biases such as anchoring, recency, confirmation, addiction, loss-aversion, etc)
  • Keep learning to optimise and improve your personal skills and your trading practices

Nowadays, you can start trading with as low as $100, but don’t expect to make a living with such a small amount of initial capital.

Part-time vs. Full-time traders

Obviously, starting as a part-time trader requires less trading capital than starting as a full-time trader.

It’s also easier to start small in order to test your trading strategy, to learn how to follow your trading plan no matter what, and to build confidence in order to become a good trader, while earning extra money to complement your salary.

You’ll also have less pressure and emotional attachment than if you had to trade for a living straight away, because you still have the benefit of income from your job. You can then focus on becoming a good trader that makes profits each month.

If you can make winning trades and constant profits with a small/medium trading account, then you can do the same with a bigger account.

Don’t be undercapitalised

Let’s say you’re starting as a part-time Forex trader to test your trading strategy starting with around US$5,000 to $US10,000. A reasonable goal to target would be around 2% return each month with an annual growth goal of around 20%.

Of course, you will use a certain level of leverage to increase your returns.

With 30:1 leverage, your US$10,000 account will allow you to invest up to US$300,000.

To open one “lot” on a currency pair, the required margin linked to 30:1 leverage will be about 3.33%.

If you want to succeed, you should follow best practises: always stick to your trading plan and control your risk to protect your capital. For instance, only risk 1% of your money on each trade.

With an account size of US$ 10,000 you should then only risk US$100 on each trade.

Of course, if you want to make a living from Forex trading, you need to start with enough trading capital.

If you’re wondering what the exact amount of capital is – there is no direct answer, as it depends on you, your trading system, how much you’re ready to risk, as well as how much you plan on potentially earning.

To know how much capital you should use to start trading, it’s important to take into consideration firstly how you’re going to be educated, and how you’re going to approach the Forex market.

Receiving a stellar tr ading education is absolutely essential if you want to be successful. At My Trading Skills we offer a stellar online financial trading education. See the features of the course here.

It’s risky to start using real money before you understand how trading works. Invest in yourself by improving your trading knowledge, so you avoid making costly mistakes that take you out of the game before you’ve even got started.

Once you learn more about these trading practices, you can determine the way you approach the market.

  • How available are you to trade?
  • Are you going to use technical or fundamental analysis?
  • Are you going to develop automated trading strategies, or rather use discretionary trading techniques?

Thinking about trading approaches, you’ll come to realise that what your Forex broker provides for analysis isn’t enough. Your trading system may require purchasing additional software, trading tools, or powerful news feeds, for instance.

Once you know how much trading education you need, and if you’re going to require additional tools to properly trade, remember that you will need to trade large enough trading positions to be able to make money to sustain a healthy income.

You will also need to make sure you’re not placing excessive risk on one single position.

You can get inspired by these stories, but don’t compare yourself to these people – their situation is completely different. You have different starting capital, risk tolerance, trading method, risk and money management rules, trading experience, etc.

Despite these stories, trading isn’t a “get rich quick scheme” – it’s a business, one that requires work and dedication to grow over time.

Knowing exactly how much money Forex traders earn every month or every year is impossible.

No one really knows.

But there are some elements you can take into consideration to get a good estimation of how much money you can make from FX trading.

Key elements to consider:

  • What is the size of your trading account?
  • How many trades will you do per year?
  • What is your expected return for every dollar you risk (trading expectancy)?
  • How much you will risk per trade?
  • Will you withdraw your profits, or not?

Let’s return to our previous example of a US$10,000 account.

If you plan to place 150 trades per year, and for every dollar you invest, you target an expected return of 20% over the long term.

While doing this you risk only 1% of your trading capital, or US$100, each time. You will not withdraw anything, so you can compound the returns in your account.

If you multiply your trading expectancy, your trading frequency and the size of your investment on each position, you can calculate your potential profits.

With the above conditions, you can expect to make on average $3,000 a year, or 30% on a US$10,000 account.

Obviously, the more you trade, the more money you can potentially make.

The same applies to your bet size – the more you risk per trade, the more you can make on average. And of course, regardless of your trading strategy, the more trading capital you start with, the more money you can make.

In any case, the odds of you building a successful trading career are good if you start acting like a professional trader, with realistic goals set in place and a sound trading strategy with a positive expectancy.

Like any other kind of job, Forex trading requires that you learn the right trading skills and techniques.

Learning from (or better yet, with) mentors who are successful and experienced Forex traders is probably the easiest and most effective way to receive the required trading knowledge and practice to forge your trading career.

Reading the stories of profitable Forex traders’ road to success can also give you ideas on what to do, as well as which mistakes to avoid, without sacrificing any of your trading capital.

George Soros, Bill Lipschutz, Paul Tudor Jones, Stanley Druckenmiller, Andrew Krieger are frequently listed amongst the best Forex traders . They all have a story to tell, not only of their successes, but also their mistakes. All of them have a lot to teach you on how to profit and make money with Forex.

So, consider this …

Entering trades is like a battle – if you want to win it, you need to be ready and prepare for it. Markets are unpredictable, and you can’t predict every possible scenario, but what you can control is yourself.

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