I received this email question from one of our new female traders.
Yesterday I began to be really vigilant about asking myself a series of questions before each trade. I need to improve on answering each of them accurately and honestly (a goal for today), but I think the practice is hugely helpful. Is there anything you would add to this list?1) What is my reason for being in this stock?2) Is this the right entry? If not, what is?3) How much should I be risking before this trade proves me wrong? What is the probability of this trade?4) What is my target? How will I take profits?5) What other parties are in this trade? How would they react if X occurs?
@mikebellafiore
I love this idea. When I am considering a trade I ask myself:
a) Where can I get out if I am wrong?
b) How big should I be in this position considering where I can get out?
c) Is this trade worth my intellectual and financial capital?
d) If the trade starts to work how can I get bigger?
I start to visualize what I want to see the stock do for me to get bigger.
e) Do I have to watch all the ticks in this stock or can I just let it go and find another good trading opportunity?
So I ask, what do you think about when in a trading position?
Mike Bellafiore
2 Comments on “What questions do you ask before making a trade?”
0. Is the RR really worth my entry?
1. Is this a playbook entry?
2. What’s the big picture? What’s the trend?
3. Where are the obstacles? Aren’t they too strong?
4. What is playing in your favor? What is playing against?
5. In case of the worst case scenario, will you be ashamed for this trade?
6. Do you really believe you can make money playing setups like this one in a long term?
7. In what way have recent trades influenced your mindset? Are you trying to compensate recent losses? Are you on a positive wave after a winner looking for more quick money?
thx to Boocha ;-).
Mike,
Great thread.
For years checklists have been shown to measurably improve outcomes in mission critical, high stress environments, specifically in piloting aircraft and hospital ERs. Further these industries have used feedback loops from catastrophic events to continually improve outcomes by removing errors (procedural, emotional et al) from their processes.
The emotions associated with taking on and managing risk (trading) makes is a *great* candidate for list processes. Also IMO, *all* consistently profitable traders use lists either consciously or unconsciously in their trade idea development and execution.
I view a playbook of positive expectancy trades as a set of lists. The IF/THEN structure of SMB playbooks is a great list metaphor for making trading as objective as possible.
I compliment my playbook with two separate lists during the trade day. One for trade strategy development and a second for trade execution (regardless of the individual playbook setup)
Here’s what I use (note has a lot of my own shorthand that my not be understandable)
*************
Strategy/Scenario Checklist:
Macro TF trend: U/D/S
Trend or Counter-Trend
What location variables are coming together (how many: TL/IL/TP/Fulcrum/VS)
What is catalyst to move price (B/S Fail, Level hold, Break and hold, $ extension into location convergence)
What has to happen for strategy to be invalidated
What is the trader psychology of *both* buyers *and* sellers in this chart
Is there news risk during the likely duration of the potential trade
Is market high or low volatility
Are correlated markets confirming, neutral or non-confirming
Target Analysis
Where are macro TF S/R target levels and convergence of location variables.
What is *confidence* of targets being hit.
Is 1:5 risk:reward possible
Trade Checklist:
Setup confirms strategy (NOFOMO trade setups)
News check
RT zone or time NML
Are you getting *great* entries (NOFOMO entries)
Size. Get uncomfortably big with initial position in A+++ trades, *no whimpy trades*
Technically relevant stop beyond S/R areas to keep the 1:5 R:R probability….balance
What are next likely setups in line with strategy *until* strategy is invalidated (per the strategy checklist) or targets are hit (where do I add)
Breathe
**************
These lists are a BIG part of my trading processes in addition to my playbook.
Last note. Early on in my trading career, I always felt time pressure and didn’t think I had *time* to devote to answering explicit questions on a lists like these. But over time, I found that there is a significant amount of time available when watching trades develop and even during setup execution (watching replay of your trades is VERY helpful to fully understand this.) I found that checklists were one of the most effective ways to remove errors from my trading and engage in a process of continual improvement. The lists today reflect three themes that I’m working on: (1) Better macro trade strategy analysis (2) Removing/Reducing *Fear of missing out* from my trading and (3) Getting bigger size to larger targets.
Best,
-B