Originally published at: https://optimusfutures.com/tradeblog/archives/pre-trade-checklist-scoresheet/%20
This article on Pre-Trade Checklist is the opinion of Optimus Futures
When given the choice between trading objectively and trading solely “from the gut,” chances are that an objective approach might suit you better. Elite traders (as we covered in a previous article) may be able to combine both, trading intuitively or, as the cliché goes, “in the zone.” But rarely would they rely solely on one or the other, as intuitive decision-making often relies on both capacities combined–that is, being able to harmoniously fuse objective and subjective approaches.
One simple but effective way to make objective decisions while trading is to keep a pre-trade checklist with scoresheet in hand. It isn’t rocket science, but the simplicity of the approach often conceals the much larger benefits that such a trading scoresheet can provide.
Main Benefits of using a Pre-Trade Checklist with Scoresheets
A trading scoresheet can help you with at least three crucial goals, further expanding your capacity to trade in a more flexible and opportunity-rich market environment:
- It can help prevent you from over-trading:
You can decide which trades “deserve” to be executed and which ones to skip.
2) It can help you optimize your position-sizing approach:
Evaluating the trade risks can help you determine the number of Futures contracts to run on each trade. You can move from fixed-position trading to a variable R% trading approach that will not only help you minimize risk but can also help you maximize profit potential.
3) It can help increase your range of markets:
Armed with a scoring method, you can evaluate several markets to see which ones might provide a more favorable reward-to-risk scenario. giving you better and (hopefully) higher-probability trading opportunities.
So, how might you get started? Here is one simple method to begin scoring trading opportunities before you pull the trigger. Bear in mind that our examples use three parameters to score potential trades. You don’t have to limit yourself to just these three. Each trader is different, so be sure to customize the parameters so as to better align them with your own approach.
How to Set Up A Pre-Trade Checklist / Trading Scoresheet
Step 1: Score the Technicals
Provide a score from 1 – 10, with 1 = least favorable to 10 = most favorable)
Use this score to qualitatively assess technical aspects such as support and resistance, chart patterns, indicator/oscillator readings, etc. There are a few sites (and books) that rank technicals based on past performance. Although the probabilities change over time, such an index might be useful when considering the historical outcome of certain trades. Otherwise, you can base the score on your own knowledge and experience.
Step 2 – Score the Reward-to-Risk Potential
Provide a score from 1 – 10, with 1 = least favorable to 10 = most favorable)
This is a tricky score because it depends on how much you are willing to risk versus how much you expect to gain in an optimal reward-to-risk scenario.
- For instance, if the worst score is 1, then how low of a reward/risk would you be willing to endure? Would you be willing to accept a trade that can potentially generate a 0.50-to-1 return, which is a 2:1 “risk/reward” probability? To approach it from a different angle, would you consider risking $1,000 in order to make $500–or would you risk more or much less ? Once you determine your riskiest trade ratio, then you can assign that as your baseline for absolute worst, as score of 1.
- What about your best possible reward-to-risk scenario? Is it realistic to shoot for a 10-to-1 scenario, where you seek a reward that is 10 times the amount of your risk, as in risking $500 to make $5,000? Or might you consider a 3-to-1 or 5-to-1 a more realistic “optimal” goal? Once you determine your maximum return, assign that return to a score of 10.
- The score in between will depend on how you divide worst to best, and this will likely require some calculation on your part.
Step 3 – Score Directional Forecast Against Fundamental Outlook
Provide a score from 1 – 10, with 1 = least favorable to 10 = most favorable)
Have you ever made the mistake of going long a commodity during a period of booming supply and receding demand? If you were aware of these conditions and decided to take a contrarian position, or a smaller counter-position within a larger trend, then perhaps you can be excused if you ended up with a loss. But if you weren’t aware of the supply and demand conditions, only learning about it after the fact, didn’t you feel kind of foolish?
Remember that fundamentals drive the longer-term trend, so it might behoove you to pay attention to the economic factors affecting the markets that you trade. This too, you can rate on a scale from 1 to 10, depending on how aligned your trading thesis is with the overarching fundamental conditions of the market.
The Final Tally
The highest score would amount to 30. On a subjective scale a score between 0-10 would be relatively unfavorable; a score between 11-20, somewhat favorable; a score between 21-30, favorable to highly favorable. Again, this is just a tool to help you determine the potential favorability of your trade. You can include more parameters or even change the point system.
Whichever way you decide to implement this, make sure the scoresheet works as a quick checklist to emphasize the qualities that you would want to see in an optimal trade setup. By using a scoresheet, you can transition your approach from a potentially haphazard way of trading to a more cold and calculated way of exploiting the markets.
There is a substantial risk of loss in futures trading. Past performance is not indicative of future results.