Pre-Trade Checklist for Swing Trading Forex

Cory Mitchell, CMT

For each strategy you trade, have a pre-trade checklist. With swing trading, before placing your orders, go over the check-list to make sure that the trade meets your strategy guidelines. 

Your strategy guidelines are laid out in your trading plan. So the checklist is just a summarized version of your trading plan.

If you don't have a trading plan, don't trade.

A trading plan defines when and how you enter and exit trades (stop losses, targets, trailing stop loss. These methods should be tested to show profitability over many trades. 

The trading plan also defines what pairs are traded, how risk is managed, how strong correlations are handled, what position size to take, maximum allowed drawdowns, when trades aren't taken (right before news, for example).

Example Pre-Trade Checklist

Here is an example of a swing trade checklist for trading price structures...along with loads of tips to help you out. This checklist is designed only for trading price structures and is not applicable to other strategies or markets. It is longer than it needs to be, as I am also explaining parts of the strategy as I go along.

The questions or notes need to be answered Yes/Correct in order to take a trade, unless otherwise specified.

  • 1) I have connected all relevant swing highs and lows to each other (horizontal and ) diagonal) on my daily and hourly charts? This will help establish profit targets, establishing trend direction, and avoiding being biased base on opinion instead of price action.
  • 2) Is the trade near the edge of a price structure on the daily chart?
    • If not, is the price trending from one edge of the structure to the other, providing a trend trade or option to add to an existing trade? [hourly chart]
      • Is that trend near an edge that provides for small stop loss opportunity? For example, is it near the bottom of a short-term rising channel? [hourly chart, can use 15- or 5-minute chart for entry]

The example below shows the price moving down in a large daily chart price structure. The upper edges of a descending channel (smaller hourly structure within the larger) provide trade opportunities as the price progresses toward the bottom of the larger structure.

  • 3) Has the price slowed down on the hourly chart or 15-minute chart near the structure edge: Consolidated? Or shown weakening movement into/near the price structure edge? False breakout in opposite direction?
    • If the price hasn't slowed down/consolidated, did I wait for price action to indicate the price was reversing off the price structure edge? The chart below shows an example of this. It is a 15-minute chart and as you can see it didn't give us much of a chance to get short near the top of the price structure (declining blue trendline).
  • 4) I haven't assumed any breakouts. (I struggle with this one sometimes...looking at too big of a picture and placing lofty targets based on structures that require one or two breakouts. Better to take profits when the next applicable structure level gets hit. Can always re-enter if another trade sets up and the price keeps moving).
    • If the price does break out, await another opportunity to get in based on a new or existing price structure, possibly using an existing hourly structure as discussed in checklist item 2.
  • 5) Is my target conservative, in that it is near the opposite side of the current daily structure, but above the prior swing lows (short) or below the prior swing highs (long)? First chart below.
    • Hourly structures can also be used as targets if they provide a good reward to risk. In this case, because we are seeking smaller movements that are easier to reach, we can place a target just beyond the prior low if short or just beyond the prior high if long. The second chart below shows an example of this. For the CHFJPY short above, we could already project a channel downward providing a shorter-term target to lock in profit on that decline.
      • Choose hourly targets if you regularly monitor for trades. Use daily structure targets for fewer trades.
  • 6) The trade provides a reward:risk of greater than 3:1 (3R) based on my target being near the opposite side of the daily or hourly structure the price is currently in. 
    • If the trade is less than 3R, did I drop down to a lower timeframe (15- or 5-minute chart) to seek a better entry (tight stop loss) and therefore increase the R of the trade?
      • This is beneficial no matter what.
  • 7) Does my position size expose me to less than a 1% loss of my account capital if the stop loss is reached? This is called Account Risk. 
    • Up to 2%  maximum. Set your account risk, and don't change it. See Position Sizing for more on how this works.
  • 8) Check if the trade is strongly correlated (greater than 75, or less than -75) to any other trades I am taking or currently have.
    • Can maintain normal position size up to 2 highly correlated positions. All highly correlated positions should not expose an account to more than 2x Account Risk (%) discussed above.
      • Not required if trades "hedge" each other. A hedge offsets risk, it doesn't increase it.
      • If a trade has a lock-in profit (trailed stop loss), that trade no longer presents a risk to capital. Therefore, new correlated positions can be taken (or current positions can be added to) with little regard for the existing locked-in profit trade.
  • 9) If a trailing stop loss is to be used (not required), have I determined what method I will use?
    • Choose a trailing stop loss and how it will be implemented/used.
  • 10) Check the economic calendar and don't take trades with high impact news coming out shortly. 
    • Based on prior price movements, a trade should only be taken if the target can likely be achieved prior to the news. (Doesn't mean it will achieve it. Don't take the trade if the target is unlikely to be achieved before the announcement). 

Final Word on the Pre-Trade Checklist For Trading Forex Based on Price Structures

This is one example of a pre-trade checklist. Come up with your own for your strategies. 

Once you know it, it can be reduced to a few words "Near edge", "1% position size", "No news" for example. A small piece of paper with those short phrases written down will make it a lot quicker to run through the checklist when trading.

Go through the checklist even when you know it well. All of us fall prey to biases and opinions, or we just want to take a trade and so we skip the checklist and end up in a poor trade. 

The checklist is there to protect our mental energy from being consumed by poor trades, as well as preserve our capital for trades that meet our requirements.

We all make mistakes. I made a mistake on a profit target the other day, making the assumption the price would break out of a structure and then still move a long way to my target. It wasn't an outlandish projection, but it didn't align with the strategy/checklist. Checking the checklist before every trade helps prevent many of those mistakes.

Here's a video on trading price structures:

By Cory Mitchell, CMT. Join me on Twitter @corymitc.

Disclaimer: Nothing in this article is personal investment advice, or advice to buy or sell anything. Trading is risky and can result in substantial losses, even more than deposited if using leverage.

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