Forex Blog

First-hand Forex trading experience and information about foreign exchange market that will be useful to traders

Archives

Forex Trade Entry Checklist

April 20, 2015 (Last updated on May 23, 2017) by

The aim of a Forex trading checklist is to prevent impulsive trading and accidental mistakes. An essential checklist for smooth execution of a basic Forex trading entry is presented below. Feel free to build on it and modify it according to your trading style:

1. Check the charts.

Do they show anything resembling favorable entry conditions according to your strategy?

2. Identify the entry level.

You should know the exact entry level.

3. Determine the time period when the entry level would be valid.

Some entries can expiry quite soon, some will stay longer. Consult with your strategy about that. You should have a very clear idea of the time when you would discard this trade opportunity.

4. Identify your profit target.

There can be more than one, but all targets should be rather clear. If you do not have the exact price level conditions for profit taking, you ought to write down the exact indicator/time/fundamental conditions that would trigger the exit in the profitable area.

5. Identify your stop-loss.

Setting hard stop-loss is the best option, but you can use a conditional exit based on something else than a currency rate — time, technical indicators, fundamental factors etc. In any case, you need to know the unambiguous conditions for exit with loss.

6. Calculate the resulting risk-to-reward ratio.

Calculate your risk-to-reward ratio by dividing the stop-loss distance by the take-profit distance. Check if the trade’s R/R ratio is good enough according to your trading strategy. If you prefer trades with at least 1:2 risk-to-reward ratio, and the current trade only promises 1:1.5, it is better to skip it.

When you do not have exact price levels for take-profit and stop-loss, it is much more difficult to calculate the R/R ratio. You would still have to estimate the approximate risk-to-reward ratio for exits based on other conditions rather than on price.

In any case, it is better to avoid the trades with subpar R/R ratio.

7. Calculate position size.

Calculate position size based on your stop-loss, the risk tolerance of your money management strategy, and the size of your account.

For example: if your system lets you risk only 1% of your account balance per trade, your account balance is $5,000, and your stop-loss is at 10 pips from entry on EUR/USD pair, your position size would be 0.5 lot ($5,000 * 1% / 10 pips / 10 $ per pip).

Another example: your system lets you risk $100 per trade, and your stop-loss is at 50 pips on EUR/USD pair. Your position size should be 0.2 lot ($100 / 50 / 10 $ per pip).

You can use a position size calculator to do all such computations, but you must have a position size, which corresponds with your trading strategy, the planned trade, and your current account status.

8. Check if you have enough margin.

Position’s R/R may seem good, the position size is calculated, but you should also check if your account can tolerate opening this new trade in terms of enough free margin. Usually, the process is quite straightforward.

If you are trading a currency pair where USD is the first currency (base), then the cost of one lot is $100,000. If you are trading currency pairs where USD is the second currency (quote), then the cost should be multiplied by the currency pair’s rate (e.g. if EUR/USD is trading at 1.1000, then the cost of one lot is $110,000.) The next thing is to apply your leverage — just divide the cost by your leverage. Then multiply the result by your position size, and you have the required margin.

For example, you are trading GBP/USD. The current rate is 1.5000. The cost of one lot is then $150,000. Your leverage is 1:200 and position size is 0.2. The required margin is $150.

There are some exotic cases when margin is calculated differently, but this is beyond the scope of this checklist. You can install the Position Size Calculator indicator for MetaTrader to calculate the required margin of future trades automatically.

9. Make sure you have chosen the right currency pair.

It may sound like a no-brainer, but many costly errors have been experienced even by professional traders who accidentally opened a right position on a wrong trading instrument. Double check that you are opening a trade for the correct currency pair — some brokers may have several symbols for the same pair, which differ by margin, contract size or swaps.

10. Make sure you have set the right entry and exit levels.

Mistyped pending entry level, a stop-loss or a take-profit may result in hefty losses for your account. Double check that you have the right values in.

11. Make sure that the position size is set correctly.

It is one thing to calculate the optimal position size. The act of similar importance is to make sure that the right value has been entered into your platform’s new position form.

12. Optional: Enter your expiry date.

Most traders prefer GTC (good-till-cancelled) orders but sometimes, expiring orders are appropriate. If your strategy calls for such an order, make sure you are setting the right expiry date and time.

13. Optional: Set maximum slippage.

Setting maximum tolerable deviation of the actual market order entry price from the planned one can help you to avoid slippage that is too big for your trading strategy.

14. Push the button!

The right one. Make sure you are not cancelling the trade or pressing some special button that doubles the trade’s volume or something like that.

15. Make sure that the position opened as intended.

Look at the entry price and the resulting volume. Slippage could have affected the former; poor liquidity could have made the volume lower than you have planned for.

Done!

If you have developed your own Forex trading checklist, please feel free to share it is with use using the commentary form below.

2 Responses to “Forex Trade Entry Checklist”

  1. Jacek

    I allow myself to trade severeal trades at a time therefore I check my overall risk exsposure. If it is a second or third trade I also check correlation to check if I am not doubling risk.

    Reply

  2. Haroun Kola

    Keep it simple opening trades.

    Reply

Leave a Reply

required
required (will not be published)
optional