Trading can be a complicated venture, which is why you should always be prepared, especially if you’re a beginner. More often than not, beginner traders tend to panic whenever they open a position. One of the things you can do to achieve successful trades is to create a checklist.
Keep in mind that a trading checklist is different from a trading plan. A trading checklist serves as a filter to guarantee that things are working properly whenever you open a position or start trading. On the other hand, a trading plan is the bigger picture where technicalities are used.
In this article, we’ll discuss some of the things you should include in your trading checklist.
1. Market Analysis
Even if your trading plan is already prepared, it doesn’t mean you should dive straight into opening a position. Instead, a comprehensive market analysis should be done to make sure you’re starting on the right foot.
As you know, market analysis involves studying market trends and sentiments, the potential impact of current and recent economic changes, and whether the market is an uptrend or downtrend.
Knowing the status of the market allows you to decide whether your trading plan will work. In addition, you can decide whether you want to buy or sell underlying assets.
2. Risk-Reward Ratio
The next thing you should include on your checklist is the risk-reward ratio. Do you think your trading plan can help you gain profit? You can find this out by making sure you have a favourable risk-reward ratio. According to experts, the ideal risk-reward ratio is around 1:3, wherein when you win one out of four trades, you’ll still break even.
Unfortunately, if this is not the case, you must reassess your plan to make a safer one. Of course, since you’ll want to gain profit, knowing the risk-reward ratio can be a great opportunity to check your plans.
3. Position Sizing
Do you think the position size you’re planning to place is enough that you’re not risking too much of your capital? Aside from the risk-reward ratio, another risk management tool you should always control is the position size.
For instance, some beginners who are trading using CFDs tend to maximise the position size since they don’t have to pay for the full value of the assets. The common notion about this is that maximising the position size can magnify their gains and diversify their portfolio. Unfortunately, this can also magnify their losses, and they may end up losing their capital.
4. News and Events
Checking current news and events is also essential before you start trading. As you know, market conditions, economic reports, geopolitical events, and current news can significantly affect the change of value of any underlying asset.
In addition, even if the news and events aren’t directly related to the financial market you’re trading, you should still know whether it’s going to affect your trading plans.
If you invested in an economic calendar, you shouldn’t forget to check it before trading. Aside from the news on TV and website, you should also follow relevant trading news accounts on social media to keep you posted. Moreover, you can look at the real-time update on your trading platform, like MetaTrader 4 or 5, if you find it hard to check another application.
5. Entry and Exit Points
The entry and exit points are usually incorporated into the trading plan. However, due to various changes in the market, you might also need to make some adjustments before finalising your entry and exit strategies.
Setting clear entry and exit points keeps you from making impulsive decisions due to sudden changes in the value of the assets. In addition, you can ask yourself some questions before finalising your plan of entry and exit. Some of the questions may include: Are you going to continue your plan whether you win or lose? Do you have a concrete plan to exit the trade?
6. Divergence Check
Trading is all about knowing the right timing and strategy based on technical indications and analysis. But, do you know what happens if the expected goes in another direction? It’s when divergence occurs; the trend goes to the opposite of the result of the analysis.
However, you should know that there are positive and negative divergences. The former is when the price of an underlying asset can move higher. On the other hand, the latter is when a lower asset price is possible.
7. Asset Liquidity
Is the asset you’re planning to trade highly liquid? Liquid assets are those that can be converted to cash without affecting their actual value. In addition, highly liquid assets are those that can be bought or sold easily. So, before opening a position, you should make sure that you’re in the right market.
Final Thoughts
If you want to achieve successful trading, you should have the discipline to make plans and follow them. One of which is to consider the things on your checklist before starting to trade. With a well-planned approach, you can achieve a better portfolio in the long run.