Forex Trading Articles
THE RIGHT TRADE ENTRY CHECKLIST
By Teresa Burnett for Forexmentor.com
©
2007, Currex Investment Services Inc.
Apr 13, 2007
My trade entry checklist has evolved over the years. When I first started trading index options, I developed a spreadsheet that measured 100 columns by 900 rows which required hourly updates. After switching to the currency market I retired the gargantuan spreadsheet for a checklist, however, I still monitored quite a lot of indicators and market conditions. Illustration 1 shows one section in detail from the checklist I first developed for my currency trading.
Illustration 1
I developed the above checklist to ensure I was systematically evaluating all the factors I knew could influence the outcome of a trade. However, this checklist became an impediment to making good trading decisions. Comparing multiple currency pairs to this lengthy checklist over the course of a trading day was fatiguing to say the least.
After researching how pilots cope with large amounts of visual input that can cause sensory overload and how instrument panels are designed to avoid it, I developed a pared down trade entry checklist (Illustration 2).
Illustration 2
Though greatly simplified, after several months of working with this checklist, I realized it still left too much to my decision making. In other words, I was constantly trying to determine if enough indicators were lined up for a trade. And I had not yet determined if one indicator or set of indicators were more significant than another. By nature I am a perfectionist and will find reasons not to take a trade, waiting for another “better” trade setup or for yet another indicator to line up in the direction of the trade. Therefore, I need unambiguous entry points, stop placements, and profit targets not dependent on my subjective interpretation. Enter the new checklist: a triumph of the MACD indicator and minimalism.
Illustration 2b
The right checklist for me: minimalist decision making
My current checklist is as simple in its elements as the abstract painting hanging in my office. Not distracted or overwhelmed by too much information, here are the three factors I evaluate for a Short trade entry:
Is the 60min MACD crossed down (or below the waterline with no positive divergence)
Is the 15min MACD crossed down (or below the histogram)
Is the 15min Stochastic overbought (or is price still within 20 pips of a recent overbought point)
You might ask, “What about chart and candle patterns, moving averages, MACD divergence, trend line breaks, pivot points and the higher time frame charts?” Yes, I do evaluate these other factors and evaluating them is now second nature to me. I do not have to stop and remind myself to consider them. Top down analysis, specifically, monitoring a chart for support and resistance levels now comes naturally to me.
What I do not do naturally is evaluate the “launch / no launch” factors and the pull the trigger on a trade. By distilling the checklist to the “launch / no launch” factors I can quickly evaluate a chart to see if I can place a trade in the present moment. Therefore, if a currency chart meets the above Short entry criteria, the launch sequence has begun. Only a mitigating factor on a higher level chart (for example, an unbroken uptrend) stops me from immediately placing the trade. This has resulted in mostly stress-free decision making. For an indecisive person like me, this is progress.
How did I distill my trade entry checklist to these three factors? They are a subset of the all the indicators offered in the ForexMentor course which are referred to by Peter Bain as the “confluence of events”. I choose these three after monitoring various indicators on a daily basis for one year till I determined:
- I could spot these in real time,
- They occur on a daily or weekly basis
- They have a high probability of success
They are not the only factors, but they are the factors that work for me. The types of trades this subset of indicators catches are shown in Illustration 3, which is a 15 minute time frame chart plotted with the 15 minute MACD (setting 12, 26, 9), a 60 minute MACD (setting 48, 104, 36 when plotted in a 15 minute time frame chart or setting 12, 26, 9 when plotted on a 60 minute time frame chart), and the 15 minute Stochastic (setting 14, 1, 3). For these entry points, I use a 20 pip stop and a 20 pip limit.
Illustration 3
Bad Habits a Good Checklist Can Overcome
In addition to improving my decision making and helping me to avoid information overload, my checklist compensates for my weaknesses. I consider weaknesses those habits which do not support me as a trader. Here is a list of bad habits a good checklist can help overcome.
Perfectionism: The “never enough indicators lined up” syndrome
As mentioned, I tend to avoid trades that don’t look “good enough”. However, in the real world entry points seldom look like perfect entry points. They are subtle mathematical probabilities hidden in the charts waiting for a keen eye to observe them. My checklist keeps me focused on what is significant. By using the checklist I can trust that I have enough factors in favor of a trade.
Lack of Discipline: Impulsiveness
My trading partners have different issues; however, the same checklist suffices. For them, the checklist provides the discipline not to take trades that are close but not quite statistically in favor of a trade. In the heat of battle, it’s easy to get sucked into chasing price and to ignore the indicators. Again, consulting a checklist mitigates this.
Fear: Second guessing
In addition to sensory overload and lack of discipline, we all can spook ourselves from time to time and development an aversion to risk. After multiple stop outs, or even after a big win, during times of stress, or due to financial pressures even good traders can develop an aversion to making trades the way salespeople can develop an aversion to making cold calls. In its simplicity and reliability my checklist keeps me moving through these emotional issues. It reminds me the system works and that it is time to take a trade, regardless of how I “feel” about it.
I encourage you, especially if you are a new or struggling trader, to develop a trade entry checklist. The right trade entry checklist is as individual as you and your trading style. If you have a preferred indicator you trust and which you can easily see in real time, begin with that indicator. Try plotting your favorite indicator in multiple time frames or combining it with one other indicator and analyze the results until you are confident of your entry points and how far in pips these trades typically run. The right trade entry checklist is invaluable. It is worth all the time, effort, printer ink and paper you will invest to get it right.
In the next article we will examine how a good trade entry checklist can be paired successfully with alerts.
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