Creating a Pre-Trade Checklist for Swing Trading or
Day Trading
Use a pre-trade forex checklist to make sure your trades align with your
strategies.
Creating a Pre-Trade Checklist for Swing Trading or
Day Trading
January 26, 2023 Posted by Cory Mitchell, CMT Trading Improvement No Comments
For each strategy you trade, have a pre-trade checklist. Before placing your orders, go
over the checklist to make sure that the trade meets your strategy guidelines. It is a
quick spot-check to make sure you’re allocating your money to a good cause.
Your strategy guidelines are laid out in your trading plan. So the checklist is a
summarized version of your strategy.
I recommend that traders utilize four “documents” for their trading:
A trading plan which outlines how, when, and why you trade.
A daily routine that helps us implement our plan through daily
consistency.
• A pre-trade routine that gets us in the proper mind frame for trading.
• A pre-trade checklist or cheat sheet that we can refer to while trading to
help us follow our trading plan. This is the focus of this article.
Here is a one-page summary outlining how to make and implement a trading
checklist. More details are provided below, as well as checklist examples.
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Example Pre-Trade Checklist for Swing Trading
Contraction Patterns in Stocks
Contraction patterns are one of my favorite swing trading setups for stocks.
This is my checklist, which is focused on things I want to remember before I take a
trade. You may need to remember different things, such as checking position size, or
that your stop loss is in the right place, etc. Therefore, this is just an example. The
checklist is the bullet-point items. I have added a few comments below each one to
help you understand why I chose these particular items.
• Stock is on my scan list?
This helps avoid taking random trades. If the stock doesn’t fit certain criteria, I don’t
want to trade it.
• Market Health Indicators say ok to trade?
I only want to trade when the market is healthy. If conditions or choppy or the stock
market is plummeting, I will day trade or do something else. I won’t be buying stocks
for swing trades.
• Contraction following strong uptrend (not chop)?
Uptrend, contraction, that’s the strategy. If the price has been chopping sideways for
2 years and just happens to form a contraction pattern within that chop, that’s not the
strategy.
• Contraction size is the same or smaller than prior contractions?
If a contraction is too large relative to surrounding price action, it often signals a
reversal to the downside or an extended period of sideways movement is
forthcoming.
Down wave 2 drops to near the upward turning point of down wave 1?
This helps avoid “seeing what you want to see”. The waves must meet certain
parameters. If down wave 2 is really tiny compared to down wave 1, the pattern is
usually incomplete and needs more time. Wave 2 down still has to form.
•
Contraction longer than 1 month (from first wave peak)?
Short-term patterns can be great, but I have found they don’t work great for this
particular strategy. The price needs at least a month to coil up, often 2 or 3 months,
for a nice strong move upon breakout.
•
Historic price moves indicate at least 3:1 reward:risk potential (with
room to spare)?
I don’t want to assume I’m in a great trade. I want the average moves of the stock to
determine what the profit potential is.
•
• No earnings within a week of entry? If slower mover, 2+ weeks?
I don’t hold through earnings. The trade needs enough time to work and potentially
hit the target before I close it the day before earnings.
3 day+ consolidation, or 2 day+ with false downside breakout?
I need a valid trigger to initiate the trade.
• Top quality pattern? (not just now, but based on ALL prior trades taken)
It’s not about just taking the best pattern that is out there right now, because they all
could be crap. I want my capital to go into the best possible setups. If I have to wait, I
wait.
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Am I in the right mind frame to do this analysis and place this trade?
Did I do my pre-trade routine before analyzing these trades and placing these orders?
Am I calm? And not over-eager, jacked-up, over-confident, anxious, etc?
•
That’s the checklist
The questions need to be answered Yes/Correct in order to take the trade.
This is not an exhaustive list of all the criteria for the strategy. It is just the ones that I
like/need to remind myself of. You may forget or miss other things, so you may opt
to include those things instead.
Interested in stock trades that last one to three weeks? My Complete Method Stock
Swing Trading Coursescovers how to find and buy stocks right as they are starting a
potentially explosive move.
Example of a EURUSD Rounded Top/Bottom Pattern
RTs and RBs are exceptional patterns/strategies that work on the EURUSD 1-minute
chart. The strategy is covered in-depth in the EURUSD Day Trading Course. And
check out the quick summary version on this Twitter thread I wrote.
The checklist below is not exhaustive of all the components of the strategy. It’s the
elements that I like to remind myself of. You may need to be reminded of other
elements (where you commonly make mistakes), and thus you would create your
own checklist.
When trading a 1-minute chart, we don’t have time to physically check off a bunch of
items. If day trading, memorize your list. As the pattern is forming, mentally check off
each item. Even though you have it memorized, have it written beside you while you
trade. Read them every so often while trading to remind yourself what you’re looking
for.
Enough movement to warrant trading?
If the price is barely moving the last couple hours, I’m not trading. I don’t assume it
will start moving more. If it does, then I can trade.
•
• Slowing into high(RT)/low(RB)?
The point of the pattern is that the trend slows and reverses. Without the slowing, the
reversal is more questionable, even if it does happen.
Strong reversal?
If the price chops its ways to a reversal, the move has less conviction than a strong
swift move.
•
Trade trigger within or very close to the existing pattern?
If the trade trigger occurs far away from the rest of the pattern, the move I wanted to
be in has already happened. The opportunity is gone; the trade didn’t set up. Await
another opportunity, such as a TC (another pattern covered in the course).
•
Clean waves?
Ideally, the pattern is composed of rhythmic waves. If the movements within each
wave are choppy, then there will likely be multiple triggers and it’s harder to decide
which to take. Avoid chop.
•
The pattern is composed of actual price waves. Not just some sideways candles that
happen to make a tiny mountain shape.
• Are people screwed?
The best trades are when people need to flood out of their existing positions which
pushes the price in our expected direction. If the price has been chopping around, no
one probably cares about the RT or RB. They aren’t hurting. After a nice trending
move, or after a false breakout of support or resistance, if that RB or RT forms, plenty
of people will need to get out.
• Small trigger candle/stop loss for the price movement?
If the SL is too big, it’s not worth taking. There should be enough movement that the
target, which is a multiple of the stop loss, can be easily hit.
Want to learn how to day trade the biggest market in the world? My EURUSD Day
Trading Course shows you how with patterns that repeat, over, and over, and over
again, every day.
Example of Checklist for Swing Trading Forex Price
Structures
Here is the short-term form checklist for trading forex price structures. What each of
these means is discussed in more detail below. I wrote this section a number of
years ago. I have not swing traded forex in some time. But I decided to leave it intact,
with all the details, in case this strategy appeals to some of you.
1) Lines drawn and accurate according to rules?
2) Price near structure edge on the daily or weekly chart?
3) Price is weakening, slowing, consolidating, or has a false breakout near the
structure edge (15min-hourly chart)?
4) Target is reasonable (near the other side of the structure), not assuming too many
structure breakouts?
5) Reward-to-Risk greater than 3:1? Often using 5 min chart entry.
6) 1% risk or less (position size)?
7) Won’t over correlate me with other positions?
8) What trailing stop loss method will I use, if any? (state method, and how it will be
implemented)
9) Checked the economic calendar for events that could occur during the trade?
The questions need to be answered Yes/Correct in order to take the trade.
This checklist is designed only for trading forex price structures and is not applicable
to other strategies or markets. Here are details on what each of those trading
checklist items means.
•
1) I have connected all relevant swing highs and lows to each other
(horizontal and ) diagonal) on my daily and hourly charts? This will help
establish profit targets, establish trend direction, and avoid biases base
on opinion instead of price action.
2) Is the trade near the edge of a price structure on the daily chart (or your
longer time frame)?
• If not, is the price trending from one edge of the structure to
the other, providing a trend trade or option to add to an existing
trade? [hourly chart]
• Is that trend near an edge that provides for a small
stop loss opportunity? For example, is it near the
bottom of a short-term rising channel? [longer time
frame, and can use the 5-minute chart for entry]
The example below shows the price moving down in a large daily chart price
structure. The upper edge of the descending channel (smaller hourly structure within
the larger structure) provides trade opportunities as the price progresses toward the
bottom of the larger structure.
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3) Has the price slowed down on the hourly chart or 15-minute chart near
the structure edge: Consolidated? Or shown weakening movement
into/near the price structure edge? False breakout in opposite direction?
• If the price hasn’t slowed down/consolidated, did I wait
for price action to indicate the price was reversing off the price
structure edge? The chart below shows an example of this. It is
a 15-minute chart and as you can see it didn’t give us much of
a chance to get short near the top of the price structure
(declining blue trendline). But we did get opportunities to enter
later on.
•
•
4) I haven’t assumed any breakouts. (I struggle with this one
sometimes…looking at too big of a picture and placing lofty targets based
on structures that require one or two breakouts. Better to take profits
when the next applicable structure edge gets hit. Can always re-enter if
another trade sets up and the price keeps moving).
• If the price does break out, await another opportunity to get in
based on a new or existing price structure, possibly using an
existing hourly structure as discussed in checklist item 2.
5) Is my target conservative, in that it is near the opposite side of the
current daily structure, but above the prior swing lows (short) or below the
prior swing highs (long)? See the first chart below.
• Hourly structures can also be used as targets if they provide a
good reward to risk. In this case, because we are seeking
smaller movements that are easier to reach, we can place a
target just beyond the prior low if short or just beyond the prior
high if long. The second chart below shows an example of this.
• Choose hourly targets if you regularly monitor for
trades. Use daily structure targets for fewer trades.
The end of the green area is the profit target (profit area), below prior highs or above
prior lows.
•
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6) The trade provides a reward:risk of greater than 3:1 (3R) based on my
target being near the opposite side of the daily or hourly structure the
price is currently in.
• If the trade is less than 3R, did I drop down to a lower
timeframe (15- or 5-minute chart) to seek a better entry (tight
stop loss) and therefore increase the R of the trade?
• This is beneficial no matter what.
7) Does my position size expose me to less than a 1% loss of my account
capital if the stop loss is reached? This is called Account Risk.
• Up to 2% maximum. Set your account risk, and don’t change it.
See Position Sizing for more on how this works.
•
8) Check if the trade is strongly correlated (greater than 75, or less than 75) to any other trades I am taking or currently have.
• Can maintain normal position size up to 2 highly correlated
positions. All highly correlated positions should not expose an
account to more than 2x Account Risk (%) discussed above.
• Not required if trades “hedge” each other. A hedge
offsets risk, it doesn’t increase it.
• If a trade has a lock-in profit (trailed stop loss), that
trade no longer presents a risk to capital. Therefore,
new correlated positions can be taken (or current
positions can be added to) with little regard for the
existing locked-in profit trade.
•
9) If a trailing stop loss is to be used (not required), have I determined
what method I will use?
• Choose a trailing stop loss and how it will be
implemented/used.
• Renko
• Aggressive one-bar
• ATR Multiple or Moving Average
• Trail stop behind swing lows/highs as they form
• No touchy-touchy (don’t move anything)
10) Check the economic calendar and don’t take trades with high-impact
news coming out shortly.
• Based on prior price movements, a trade should only be taken
if the target can likely be achieved prior to the news. (That
doesn’t mean it will achieve it. Don’t take the trade if the target
is unlikely to be achieved before the announcement).
•
Final Word on the Pre-Trade Checklist For Trading Forex
Based on Price Structures
Go through your personal checklist even when you know it well. All of us fall prey to
biases and opinions, or we just want to take a trade and so we skip the checklist and
end up in a poor trade.
The checklist is there to protect our mental energy from being consumed by poor
trades, as well as preserve our capital for trades that meet our requirements.
Want to learn how to day trade stocks? It only takes about 30 minutes a day (trade
longer if you wish).
The Price Action Stock Day Trading Course shows you how.
By Cory Mitchell, CMT
Disclaimer: Nothing in this article is personal investment advice, or advice to buy or sell
anything. Trading is risky and can result in substantial losses, even more than
deposited if using leverage.
Related
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A Complete Trading Plan For Becoming a Better Trader
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About Cory Mitchell, CMT
Cory is a professional trader since 2005. In between trading stocks and forex he
consults for a number of prominent financial websites and enjoys an active lifestyle.
He runs TradeThatSwing and coaches individual clients.
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