Checklists save trades (and lives)

Checklists can save trades (and lives)

Doctors lose patients all the time.

They die on the operating table.  They die in intensive care checklist, swing trading pre-checklist

Sometimes everything was done as perfectly as possible and it failed.  Other times, mistakes were made…a valient effort was given, but just one or two small, miniscule errors occured that eventually killed the patient.

Take for example the simple task of putting lines and tubes in a patient.  Intensive care units put 5 million lines into patients every year in the United States.  Line infections occur in 80,000 people each year and are fatal between 5 and 28% of the time!

Apparently, putting a line in a patient is a simple task, but if anything is screwed up along the way, it could end up killing.

A critical care specialist at Johns Hopkins Hospital in Baltimore, MD created a checklist to avoid infections when putting a line in a patient.

It had steps like:

  1. Doctors are supposed to wash their hands with soap,
  2. Clean the patient’s skin with chlorhexidine antiseptic
  3. Put sterile drapes over the entire patient
  4. Wear a sterile mask, hat, gown, and gloves
  5. Put a sterile dressing over the catheter site once the line is in

and on and on and on…

After the hospital implemented the checklist, do you know what happened?

The results were so dramatic that they weren’t sure whether to believe them: the ten-day line-infection rate went from eleven per cent to zero. So they followed patients for fifteen more months. Only two line infections occurred during the entire period. They calculated that, in this one hospital, the checklist had prevented forty-three infections and eight deaths, and saved two million dollars in costs.

This was the result of implementing a crappy, boring checklist.  It’s not complicated, and seems rather unimportant, but there is a fine line between having a patient walking out the hospital doors on their own or dying and heading to the grave.

Having a pre-trade checklist can also make a huge difference for traders

Sure, this isn’t life or death, but heck, who wants to lose money when you don’t have to?  Trading is hard enough as it is!

There are so many moving parts and pieces to put together to become successful as a trader, having a pre-trade checklist can make the difference between becoming a winning trader year after year, or blowing out and never coming back.

Before I became a disciplined trader, I entered trades because they “felt right” or looked “perfect” to me.

I had to enter.

Sure enough, most of the time I would take a loss.  Sometimes a huge loss (at the time I also didn’t have a risk management plan…actually I didn’t have a plan at all).

Over the years I finally gained control of myself and came up with a written trading plan that I followed to the letter.

I also implemented a pre-trade checklist.

It’s pretty darn extensive, but quick and easy to quickly go through.  Once I took the time to create it, the hard work was done.  I use my pre-trade checklist before entering any position.

It’s caught more than a few trades that I thought looked good, but in reality, were missing a few key traits that I want in a trade.

Sometimes a potential trade doesn’t have the right amount of reward vs. the risk.

Other times the pattern (I trade variations of one basic swing trade pattern) was not ideal and was missing a critical element.

Here is why I think checklists are so great:

You create them in a calm space…a time when you clearly think through all aspects of what makes a successful trade AND a successful trader.

When I come across a potential trade, everything initially might look fantastic.  Sometimes my emotions of wanting to jump on the trade (a personality “flaw” that I have) are starting to take over.  But armed with my checklist, I calmly tick through all of the basics.  It centers me.  It keeps me feeling rational.  Cold.

For the most part, the items on my checklist are simple and obvious.

But I have found that it makes all the difference in the world.  It keeps me honest with myself.

Going back to the article I referenced, one of the doctors reacted to the implementation of the checklist in this way:

“Forget the paperwork. Take care of the patient.”

That’s a mistake.  That’s letting your emotions get the best of you.  The doctor wanted to jump right in and start rushing to take care of the patient.

This is exactly what I used to do when I saw a promising trade.  I didn’t want to miss out, and felt the need to jump aboard without wasting time to make sure it had everything I was looking for.  It looked right and felt right, so I would just take the trade.

There certainly is an “art” to being a doctor, and there is an “art” to being a trader.  Having a checklist might seem constraining.  Restrictive and boring.

But who says trading has to be exciting?

I trade now to make money.  I don’t trade for excitement.

Having a pre-trade checklist keeps my emotions grounded, making me stop to coldly ensure that everything about the trade is as I want it.  If the potential trade doesn’t meet my requirements, I move on.

There are tons of potential trades out there.  Why not make sure you take a trade that is exactly what you are looking for?

What I look for in a trade is going to be different from what you are looking for.

Trading styles are different, technical patterns and setup requirements are going to be different, so every pre-trade checklist is going to be different.

For my patterns, I have many different technical conditions that need to be met, or I’m not taking the trade.  Aside from that though, every pre-trade checklist should probably share basic fundamentals across all trading styles and methods.

However, I believe that there are a few critical items that should be on every pre-trade checklist.

  • Does this potential trade fit my trading plan?
    • Make sure all of the technical patterns you require are there.
  • Where will I set my stop-loss?
  • Where where is my expected exit?
  • Risk vs. reward – Based on my stop-loss and expected exit, does it meet my requirements?
  • Is my potential position sized correctly based on the stop-loss? (I never risk more than 2% of my portfolio on any trade)
  • Does the setup pattern look good in 3 different timeframes? (One higher and one lower than your current timeframe)
  • Is the general market trend likely to move in the direction of my trade?

Do you have a pre-trade checklist?

I’m curious if you have a pre-trade checklist?  If so, are there some items that you include that I didn’t list here?

Has it  helped you with your trading?

Let me know!


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