Why You Need a Trading Checklist
Checklists can save your life.
Literally.
Anesthesiologist Peter Provonost studied how 100 Michigan hospitals inserted central lines (also known as intravenous tubing) into patients' chests. .
Central lines deliver lifesaving medications, and proper installation is critical for avoiding life-threatening infections.
30% of the time, surgical teams skipped 1 of 5 essential steps in the process.
But by using a simple checklist, the infection went from 4% to zero, saving 1,500 lives and nearly $200 million.
That's not all.
Checklists keep planes in the air.
Checklists keep nuclear power plants operating safely.
And checklists can keep traders like you avoid simple errors that can cost you money.
Here's a simple checklist you can use to avoid errors when they're most likely — the order entry process.
Before we get to the checklist, make sure your trading platform is set up in a way that works for you.
For example, many trading platforms let you set defaults for trade parameters including share size.
You can also often set little things like how your mouse interacts with the platform.
Depending on your settings, you could even place orders with a single mouse click.
And set your chart time frames in a way that corresponds to your actual trading. Since all platforms allow you to save your screen layouts, keep yours saved so you can always go back to square one.
So take a half hour and go through your platform's default settings.
This will reduce the risk of placing accidental orders, or of accidentally looking at the wrong charts.
Now let's take a look at an actual order entry checklist that can prevent you from making errors:
Step 1: Ask Yourself If You Have a Good Reason for Making This Trade
Since they're constantly bombarded with news, data, and ideas, traders are always tempted to act impulsively.
You can counteract this tendency by asking yourself: do I have a good reason for doing what I'm about to do?
Often, that will be enough to stop you from getting in bad trades.
Step 2: Form an Entry and Exit Plan
If you've got a good reason to make a trade, now it's time to decide on an entry and exit plan.
Know where you want to get in, and where you want to get out.
You should have a stop loss to minimize downside risk, and a target price that gives you room to make a solid profit.
This will prevent you from getting in a trade, and then asking “so what do I do now?”
Step 3: Double Check Your Ticker
There are two types of “fat finger” trades.
That's what happens when a trader hits the wrong keys on the keyboard, and a whole lot of money ends up in the wrong place.
In 2015, Deutsche Bank's foreign exchange desk accidentally sent a hedge fund $6 billion because of a simple typo.
If you're not watching carefully, you could very easily buy Advance Auto Parts (AAP) instead of Apple (AAPL).
You could mix up Agilent (A) and Alcoa (AA).
Or Dominion Energy (D) and Dupont (DD).
Step 3: Double Check Your Share Size
Let's say you want to buy 100 shares of JP Morgan (JPM) at $80.
That's $8,000 — a decent chunk of change.
But what if you accidentally pop in another zero, and buy 1000 shares?
Well, you just made an $80,000 trade. That's an an extra $72,000.
And if the stock suddenly drops $2, you're down $2,000.
Had you bought just the 100 shares you wanted, you'd only be down $200!
Step 4: Double-Check Your Expirations and Strike Prices on Options and Futures
If you're trading any instrument with an expiration date, like options or futures, you must absolutely double-check the expiration dates of what you're trading.
You’re often looking at dozens or even hundreds of small numbers on a single computer screen, and it’s easy to make mistakes.
Make sure you select the right the expirations and strike prices.
This is especially important if you’re entering an order with multiple legs.
You may fool yourself into thinking you’ve found an especially attractive calendar or butterfly spread, when in fact, you just got ripped off!
Step 5: Perform a Post-Mortem Analysis of Your Best and Worst Trades
We recommend that traders keep a diary of their trading activities so they can accurately track their trading history.
We've found that this piece of advice is mostly ignored.
If you're not willing to take this step, at the very least, do after-the-trade breakdowns of your best and worst trades.
Was your rationale for the trade correct?
Did you get lucky?
What could you have done better?
How did you know when to get out?
Be honest with yourself, and you'll start to understand your true trading nature.