How to Create a Pre-Trade Checklist


For whatever reason, I’ve always liked checklists. When I started on the floor as a runner/clerk, my primary role was to support the traders. But in addition to those important tasks, I was constantly being taught about options theory, pricing, how to trade and risk management.

I remember being stressed out because on top of the fast pace and the fractions, the amount of information was totally overwhelming. I discovered that the pocket-sized trading cards everyone used on the trading floor were perfect for jotting down notes and staying organized. I still remember having cards for things like reversals and conversions and P&L diagrams for different spreads like butterflies and verticals. I must have had a dozen color-coded trading cards in my trading jacket, each one with a different checklist.

Sounds like I was a total geek, I realize, but maybe there was some method to my nerdish madness. These checklists helped me develop pre-trade due diligence habits that have served me well throughout my trading career. For those of you just starting out, try to think about developing processes that will aid you in your next 5,000 trades. Makes you want to do things right and as soon as possible, doesn’t it?

The items that go onto a pre-trade checklist may vary from one trader to another. However, among the best traders you will find many common themes. Among these is a realistic understanding that despite their best efforts and intentions, they’re just not going to win on every trade. Instead of having unrealistic expectations of winning, they consider and plan for every trade to go against them. When they go into every trade with this mindset, risk-averse traders are focused on avoiding things that can cause their trade to become a loser. Ultimately, by making a concerted effort to manage risk on every single trade, the possibility of experiencing catastrophic losses is drastically reduced.

While this is not a full account of what I feel could be on every trader’s pre-trade checklist, here are a few things that I consider a must for what should be on everyone’s list:

  • Have a plan for every trade
  • Conduct effective technical analysis
  • Identify upcoming volatility events
  • Identify upcoming dividends
  • Conduct HV vs. IV analysis
  • Model out three ways to trade an opportunity and pick the best one based on risk/reward
  • Only make a trade if it has edge
  • Plan multiple exits at the time you enter the trade (if winning AND if losing)
  • Stick to the plan

In this article, I’m going to focus on just one of the bullet points on my pre-trade checklist: how I conduct technical analysis on every single trade I execute.

From the earliest days on the floor, I had many mentors who shared their favorite technical analysis techniques. Along the way I honed down this list to just a few key things that I can quickly (but effectively) go over. I have a few goals when conducting technical analysis:

  • Discern any long- and short-term trends and momentum (or lack thereof)
  • Designate levels of potential support and resistance
  • Note the condition and the characteristics of the EMAs and Bollinger Bands
  • Make use of studies like the MACD and RSI
  • Identify any common stock chart formations that could be cause for concern

I weigh each and every item on my technical analysis checklist and use the results to decide whether or not to continue to evaluate this trade. Then, combined with the findings of the other things on my pre-trade checklist, I ultimately decide to pull the trigger or walk away from the trade.

I have found that employing this methodology has served me well over the years. Consistency, determination and an undying commitment to prioritizing risk management are key characteristics of a trader who will be able to succeed in any kind of market. I hope you consider my suggestions as you form your own trading plan and checklists.

Joe Leska, Market Taker Mentoring

Trader Education