How to Build Your Trading Checklist

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Trader – self-discipline: trade entry checklist

A trader is someone who gets involved in financial markets to make money. Some believe that in order to trade profitably, you need to get your hands on some magical trading strategy, that there is some sort of Holy Grail out there, after finding which the trader can forget about losses for good and make consistent profit.

Contents:

Being trader is not about finding the holy grail

Experienced stock traders know that being a successful trader implies having strong self-discipline.

A lot of people cringe and think of something rather unpleasant when they hear this word. However, when it comes to trading, self-discipline is linked to profit, since only a disciplined trader will be able to earn consistently. And you have to admit – it’s really nice to have a hefty amount of money in your account.

A clear trading plan that factors in every little detail helps to stay disciplined and not let emotions take over you. When you have a checklist in front of you allowing you to decide whether or not to enter a position, it becomes much easier to remain disciplined.

Trading plan is trader’s law

So, what exactly is the trading plan? Essentially, it is a list of rules that help decide whether to enter the position or stay out of the market. From a practical standpoint, the handiest option is the trading plan arranged in the form of a checklist with a list of questions to be answered before you open a position.

Traders can create such checklists on their own based on the trading strategy they use and risk management rules. By reading this article, you can familiarize yourself with a similar checklist designed for those who trade technical levels.

Things you should know about the creation of a checklist

1. Where is the price in relation to the technical level?

A profitable trader is the one who sticks to the strategy and doesn’t trade chaotically.

When opening a chart of a trading instrument, the trader needs to evaluate the price position in relation to the nearest levels. When the price approaches the level, there are two possible scenarios – either a breakout of the level or a bounce-off.

If we are dealing with support, it is important to assess the likelihood of the upward bounce and the opening of a long position. In case the level of strong resistance is approached, the quotes will most likely bounce downwards. If the price is in the middle of the range, we should wait.

At this stage, we have outlined possible scenarios and will be trading based on them.

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2. How does the price behave when approaching a level?

Let’s assume that the price has approached the level of support. Depending on the quote behavior, there can be different scenarios here. If the price is only approaching the level, it can either break it out or bounce off it upwards.

It’s way too early to make any trading decisions, and we have to wait for the situation to become clearer. If the price starts consolidating at the level, forming a horizontal trend (the base), or bounces upwards (which is called confirmation of the support level), we have every reason to get ready to go long.

3. How strong is this level?

Technical levels on the chart are notable for their strength. E.g. the level of historical highs or lows is quite strong, whereas the level that has been repeatedly “pierced” can be broken out again.

There is a rule:

The rule of thumb states that levels formed on higher time frames are stronger.

So, when the prices approach support level drawn on a weekly chart, especially if the level is located at the long-term lows, it is likely to result in the price bouncing upwards rather than breaking out the level and consolidating below it.

4. How does the level get confirmed and who generates the price movement in the market?

When the price bounces off the level, it serves as its confirmation. Pay attention to whether or not the level has already been confirmed by bounces. If there are false breakouts, especially by shadows, this also indicates that the analyzed horizontal line on the chart is strong and can stop the price.

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5. How many times did the price tested the level?

The trader is a person who should assess market probabilities. This is why traders use another trick to assess the strength of the level.

If the analyzed horizontal line stopped the price more than three times, the likelihood of level breakout increases with each subsequent approach to the level.

6. Have there been any false breakouts of the level?

As previously mentioned, some types of false breakouts confirm the strength of the level. That being said, the traders should also factor in the levels of false breakouts in order to place a stop loss accurately, assess the risk and decide whether or not to enter the trade based on the parameters of their own money management system.

7. What is the possible risk?

In the previous item, you have already evaluated false breakouts. Typically, you should place your stop loss behind them.

After calculating the stop loss in pips, you need to evaluate the volume you are going to enter with so that the risk in money terms does not exceed about 1% of the deposit. Make sure to add this value to your risk management rules.

If in case of the minimum lot you cannot afford such a risk in the deposit currency, simply skip this trade.

8. How far is the price in relation to strong daily levels?

During the previous stages, you have assessed the position of the price in relation to the levels formed on a 4-hour, 1-hour, or even lower timeframes. What you have to do now is evaluate how close/far the quotes are from strong daily levels, since in case of a breakout, there will likely be a movement to the daily horizontal lines. Keep this in mind when deciding whether to open a position.

9. What is the daily ATR and price movement potential?

Average True Range (ATR) is a technical analysis which measures market volatility by decomposing the entire range of an asset price for that period. It is vital to use it in order not to open the trade when the price has already traveled the biggest portion of the way. It is generally recommended to use a 14-day ATR. It can be determined based on the size of 14 daily candles arranged in a row. For this purpose, we pick the one of the average size and measure its value in pips by a crosshair. We also ignore abnormally large (news) candles.

So, if the price has passed 20% of the daily ATR, the quotes still have the movement potential in order to maintain 1:2 or 1:3 risk-reward ratio in the trade. If most of the ATR is passed, it is not a good idea to open a position.

10. What is the current market trend?

After you have checked all the previous parameters, what you have to do next in order to make an informed decision is figure out the trend. As we all know, trend is our friend. Trading against the trend is dangerous. In case of the uptrend, it makes sense to go long. During the downtrend you should go short. In the presence of the flat market, you can trade in both directions.

So, if you have analyzed all of the items on the checklist and have gotten a solid confirmation for position opening, go for it. However, if there are certain issues and inconsistencies, it is better to skip this entry point. The fact remains that successful trader’s rule of thumb is to first preserve the deposit, and then make money while taking reasonable risks only.

What to know:

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How To Code a Trading Bot

Trading bots are as they sound: automated asset trading programs. And you can learn how to code a trading bot for your investment needs. The main benefit of using an automated system is efficiency; bots can make much faster decisions using much more available data. They are also less costly than using human labor, which performs the same job less efficiently. Bots can work for you 24/7.

The way trading bots work is that they are programmed to your investment specifications and use all available data to analyze and predict market movement.

The Job of a Trading Robot

A trading bot uses simple code to perform several basic takes. If you want to customize your own bot you will need to become comfortable programming:

  • Algorithmic trading strategy: this uses statistical models to predict market behavior
  • Develop a personal risk profile: this will depend on your time and knowledge commitment, as well as your trading capital
  • Backtesting: you will need to run your programs to test their success, these tests will be used to validate your bot’s programs

We will look at each of the above ideas in closer detail later on in the article.

If you are interested in automated cryptocurrency trading you will need to do is program your bot. In order to be effective, your bot must be able to use market analysis to make good decisions about when to buy and when to sell. It must also be programmed to suit your personal risk profile.

Before we go any further there is a caveat when it comes to coding a trading bot; to program a bot you need to understand basic programming, for Python or similar simple programming language. This may or may not be discouraging.

For those of you who are neither interested in learning or do not have the confidence to learn that is ok. Currently, there are many platforms that sell programs that have pre-programmed bots that you can customize easily.

If you are more interested in leaving it to the experts, then check out the article Best Crypto Trading Bots.

This article will give you a brief introduction on how to code a trading bot. It also offers several useful resources to help you get a start on your research. It is very important to feel confident and competent when you are designing your bot. So be sure to access as many resources as you need to get to that place.

Once you have reached a place of confidence, be sure to test your programs. Let’s have a look at how that all works.

Here are the things you need to get code your trading bot:

  • A Windows or Mac operating system
  • Python and PIP
  • API Keys
  • Private and Public keys
  • Run MetaTrader 4 (MT4): an electronic trading platform that uses the MetaQuotes Language 4 (MQL4) for coding trading strategies. This is at Lucas Liam’s recommendation.

If you are still interested in programming your own bot, it might be helpful to start with Liam’s AngloTrading101 courses. This article is a really go place to start, but if you are serious, then arm yourself with knowledge by doing your homework.

Coding Your Bot

A trading bot is programmed to buy and sell assets for you. These functions are executed by aggregating market signals. The main components are for entry rules and exit rules. That means that your program must be designed to act on the limitations that you have set for it.

Limitations include entry and exit prices, the maximum you are willing to invest, and what assets you want to invest in. These details are very personal, and depend a lot on what your investment capital is and what your risk profile is.

Here’s What Your Program Looks Like

The following is a quick look at an example of a custom trading bot using Python and the Poloniex API.

If you are ready to get started programming, check out this YouTube channel. It is crucial to take away from the above demo that you will need to get comfortable with a programming language, such as Python.

Additionally, you also need to study and understand the markets you plan to invest in. While your bot is going to run the programs, you will have to set up strategies for the currencies and assets that you are interested in investing in.

What You Need To Do First

  • Bot Code: a trading bot does basic things with more precision and efficiency than a human can.
    • The simple code determines your entry rules. This is when to buy or to sell. And your exit rules. This determines when to close on your current position, and how many units want to sell or buy.
  • Preliminary Research: Build a personal risk profile. This will depend on your time commitment and trading capital. Once you have these in place you can begin to build a bot that has suitable trading characteristics.
  • Backtesting: Backtesting validates (or invalidates) your bot. This step is very important to learn if your bot is programmed to work as you designed it to. Be sure that your bot understands the following:
    • Different time frames for entry and exit rulesThe value and movement of different asset classesDifferent market conditions. This is particularly important. Your bot needs to have multiple market scenarios. If your bot is only programmed to work with past data, there is too much artificial certainty built into the program. This is referred to as ‘overfitting bias.’ Basically, it means that the bot does not capture enough potential for risk or reward. This requires consistent data updates and your observation to ensure the program running is inclusive enough.
  • Clean Data: This means sourcing and cleaning data to ensure that you have accurate data for backtesting. This data used must reflect the live trading environment as much as possible. Inaccurate data causes inaccurate test results. This is a trade-off between cost and accuracy. For accurate data, you need to spend more time and energy obtaining it.
  • Select A Broker: You need to choose a broker that is suited to your needs: MM vs STP vs ECN. Forexpeacearmy.com is a handy resource to help you choose a retail broker reviews
  • Design Optimization: ensure that you have enough in your program design to take into account market risks and operational risks.
    • Operational risks include System crashes, loss of internet connection, poor execution algorithm, which leads to poorly executed prices or missed trades due to an inability to handle requotes. Also, counter-party risk, broker insolvency, and theft by hackers.

Trading Strategies

While your bot does the work, you need to ensure that it applies sound statistical models in order to build algorithmic trading strategies.

It is beneficial for your bot to take advantage of the following strategy type combinations:

  • Macroeconomic news (ex. non-farm payroll or interest rate changes)
  • Fundamental analysis (ex. using revenue data or earnings release notes)
  • Statistical analysis (ex. correlation or co-integration)
  • Technical analysis (ex. moving averages)
  • The market microstructure (ex. arbitrage or trade infrastructure)

Further Research

Are you with me so far? If you have not given up yet, great! But there is still more work to be done. This is just the beginning of your homework.

If you are keen to build your own bot. Here are a few of Lucas Liaw’s homework suggestions. The HedgTrade blog can answer many of your investment queries. So make sure you understand the following concepts and how they relate to your crypto investments:

  • Market inefficiency
  • price/asset/market relationships
  • market participants
  • market microstructure
  • Macroeconomics
  • market fundamentals
  • hard arbitrage
  • soft arbitrage
  • structured products
  • order limit book
  • depth of market
  • retail traders vs hedge funds/institutional investors
  • financial exchanges
  • exchange-traded products
  • Over-the-counter
  • price expectations vs reality
  • price action and price behavior

Now that you understand a bit more of what is involved in coding your trading bot, let’s move on to the basic code that you can start with while you are backtesting.

Keep in mind this requires a serious amount of time as you get started. But once you are more comfortable with it will not feel so onerous. And, the better you get at it the more money you should make!

So, if your strategies are not working, you will need to revisit your trading strategies.

Basic Installation of Your Trading Bot

  1. Get Python and PIP ready on your computer: you will need to learn how to understand and work with basic Python language, as well as run a Python script.
  2. Install Python library.
  3. Get API keys: There is any number of accounts to get keys from. If you are starting out and do not know what to trade, Lucas Liew recommends Metatrader 4 (FX and CFDs on equity indices, stocks, commodities, and fixed income), Quantopian (stocks only) or Quantconnect (stocks and FX).
  4. The programming languages from the above platforms use MQL4, Python, and C#.
  5. Homework: Understand the following concepts
    • Coding/programming trading strategiesMQL4, MQL5EasyLanguageAFLPython/C#/C++/R/MATLAB/VBA for financeTrading TechnologiesCQGMetaTrader 4, MetaTrader 5AmibrokerNinjaTraderMultiChartsTradeStation broker AP
  6. Name your key.
  7. DO NOT Allow Withdrawal. If you allow withdrawals then your bot can withdraw money from your accounts as needed. Doing so leaves your bot open to a greater risk of being attacked, or of spending money you did not intend to.
  8. You need to secure VPS and downtime handling, and evaluation procedures. It’s necessary to monitor your robots’ performance and analyze their strategies in relation to the real market. This includes: inefficiencies, backtests, and optimizations. This must be done throughout the lifespan of your bot.
  9. Keep a safe, written hard copy of your generated key pairs and never share your private keys.

Here is a basic coding example

Final Word

While there are a lot of benefits to bot-traders, this is not a get rich quick scheme. You will need to: understand market strategies, learn basic code and maintain your trading bot with clean accurate data.

It is highly recommended that you familiarize yourself with some of the bots available currently. And if you do not think you are ready to code your own trading bot, then start with a bot from Cryptohopper or 3Commas.

Lucas Liew is a great resource if you are willing to get serious about coding a trading bot.

As the old adage goes; if it seems to good to be true, then it probably is. The real benefit to automated trading, once you have got it going, is a faster more accurate execution of entry and exit.

If your bot is working then you should be earning money. That will mean it is using as much information as possible to accurately read market behaviors and quickly and accurately executing sales.

Just because you are earning money does not mean that you do not need to maintain your bot or that you can stop backtesting. Stay on top of your portfolio and make sure your code is running the way you designed it to, and tweak it whenever necessary.

And remember, as always, DO YOUR HOMEWORK!

12. Making a Living Trading Forex

If you’re new to trading, you might well wonder if it’s really possible to make a living from currency trading, given that the overwhelming majority of small traders do not.

The short answer?

it’s definitely possible to make a consistent income from Forex trading.

So, what are your chances of becoming a successful Forex trader, and how much can you make?

Let’s jump right in.

The issue with many beginner traders is that they underestimate the level of commitment required to really succeed. They’re not ready to do what it takes to become a real trader.

They don’t spend enough time and energy to develop their patience and discipline, to build a winning attitude with a realistic mindset, or acquire the trading skills and knowledge that will allow them to make consistently profitable trades.

They often give up at the slightest mistake or challenge, or make undisciplined, wild trades which frequently leads them to lose their entire trading capital.

Read:

To be able to build a career as a full-time Forex trader, there are many things you’ll have to do right over the long-term.

Whether you’re a part-time or full-time independent trader, your main goal should primarily be to be a good trader. The money will follow.

For that, you need to act like a professional trader, and create a trading environment and routine that a professional trader would follow.

If you think about it, most professionals follow some kind of a routine, whether that be singers, athletes, or doctors. It helps them maintain a certain level of discipline in their process.

For traders, a routine is useful, because it allows them to follow a certain path when they plan their trades and trade their plans. This minimises positive outcomes and negates trading mistakes.

Don’t worry, creating a trading routine is easy – you just need to remain motivated and committed over time. The most important thing is to develop your own trading routine, one which fits your trading style and daily life.

To achieve that goal and boost your performance while continually progressing, you’ll need to:

  • Honestly assess your understanding of trading, know yourself very well, and recognise the things about yourself that affect your discipline, patience, focus, and follow-through
  • Have sound knowledge of how trading and the currency market work
  • Keep in mind your end goal
  • Create and follow a profitable trading system with a solid risk management (risk-reward ratio, win rate, stop-loss and take-profit orders)
  • Know how to adapt yourself and your trading strategy to changing market conditions over-time
  • Track your progress with a trading journal, and monitor your track-record
  • Develop winning habits and adopt a positive mindset to be able to get over the obstacles of Forex trading, as well as overcome your own unhelpful tendencies (over-trading, trading out of boredom, trading impulsively, and cognitive biases such as anchoring, recency, confirmation, addiction, loss-aversion, etc)
  • Keep learning to optimise and improve your personal skills and your trading practices

Nowadays, you can start trading with as low as $100, but don’t expect to make a living with such a small amount of initial capital.

Part-time vs. Full-time traders

Obviously, starting as a part-time trader requires less trading capital than starting as a full-time trader.

It’s also easier to start small in order to test your trading strategy, to learn how to follow your trading plan no matter what, and to build confidence in order to become a good trader, while earning extra money to complement your salary.

You’ll also have less pressure and emotional attachment than if you had to trade for a living straight away, because you still have the benefit of income from your job. You can then focus on becoming a good trader that makes profits each month.

If you can make winning trades and constant profits with a small/medium trading account, then you can do the same with a bigger account.

Don’t be undercapitalised

Let’s say you’re starting as a part-time Forex trader to test your trading strategy starting with around US$5,000 to $US10,000. A reasonable goal to target would be around 2% return each month with an annual growth goal of around 20%.

Of course, you will use a certain level of leverage to increase your returns.

With 30:1 leverage, your US$10,000 account will allow you to invest up to US$300,000.

To open one “lot” on a currency pair, the required margin linked to 30:1 leverage will be about 3.33%.

If you want to succeed, you should follow best practises: always stick to your trading plan and control your risk to protect your capital. For instance, only risk 1% of your money on each trade.

With an account size of US$ 10,000 you should then only risk US$100 on each trade.

Of course, if you want to make a living from Forex trading, you need to start with enough trading capital.

If you’re wondering what the exact amount of capital is – there is no direct answer, as it depends on you, your trading system, how much you’re ready to risk, as well as how much you plan on potentially earning.

To know how much capital you should use to start trading, it’s important to take into consideration firstly how you’re going to be educated, and how you’re going to approach the Forex market.

Receiving a stellar tr ading education is absolutely essential if you want to be successful. At My Trading Skills we offer a stellar online financial trading education. See the features of the course here.

It’s risky to start using real money before you understand how trading works. Invest in yourself by improving your trading knowledge, so you avoid making costly mistakes that take you out of the game before you’ve even got started.

Once you learn more about these trading practices, you can determine the way you approach the market.

  • How available are you to trade?
  • Are you going to use technical or fundamental analysis?
  • Are you going to develop automated trading strategies, or rather use discretionary trading techniques?

Thinking about trading approaches, you’ll come to realise that what your Forex broker provides for analysis isn’t enough. Your trading system may require purchasing additional software, trading tools, or powerful news feeds, for instance.

Once you know how much trading education you need, and if you’re going to require additional tools to properly trade, remember that you will need to trade large enough trading positions to be able to make money to sustain a healthy income.

You will also need to make sure you’re not placing excessive risk on one single position.

You can get inspired by these stories, but don’t compare yourself to these people – their situation is completely different. You have different starting capital, risk tolerance, trading method, risk and money management rules, trading experience, etc.

Despite these stories, trading isn’t a “get rich quick scheme” – it’s a business, one that requires work and dedication to grow over time.

Knowing exactly how much money Forex traders earn every month or every year is impossible.

No one really knows.

But there are some elements you can take into consideration to get a good estimation of how much money you can make from FX trading.

Key elements to consider:

  • What is the size of your trading account?
  • How many trades will you do per year?
  • What is your expected return for every dollar you risk (trading expectancy)?
  • How much you will risk per trade?
  • Will you withdraw your profits, or not?

Let’s return to our previous example of a US$10,000 account.

If you plan to place 150 trades per year, and for every dollar you invest, you target an expected return of 20% over the long term.

While doing this you risk only 1% of your trading capital, or US$100, each time. You will not withdraw anything, so you can compound the returns in your account.

If you multiply your trading expectancy, your trading frequency and the size of your investment on each position, you can calculate your potential profits.

With the above conditions, you can expect to make on average $3,000 a year, or 30% on a US$10,000 account.

Obviously, the more you trade, the more money you can potentially make.

The same applies to your bet size – the more you risk per trade, the more you can make on average. And of course, regardless of your trading strategy, the more trading capital you start with, the more money you can make.

In any case, the odds of you building a successful trading career are good if you start acting like a professional trader, with realistic goals set in place and a sound trading strategy with a positive expectancy.

Like any other kind of job, Forex trading requires that you learn the right trading skills and techniques.

Learning from (or better yet, with) mentors who are successful and experienced Forex traders is probably the easiest and most effective way to receive the required trading knowledge and practice to forge your trading career.

Reading the stories of profitable Forex traders’ road to success can also give you ideas on what to do, as well as which mistakes to avoid, without sacrificing any of your trading capital.

George Soros, Bill Lipschutz, Paul Tudor Jones, Stanley Druckenmiller, Andrew Krieger are frequently listed amongst the best Forex traders . They all have a story to tell, not only of their successes, but also their mistakes. All of them have a lot to teach you on how to profit and make money with Forex.

So, consider this …

Entering trades is like a battle – if you want to win it, you need to be ready and prepare for it. Markets are unpredictable, and you can’t predict every possible scenario, but what you can control is yourself.

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