How to create a pre-trade checklist

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• 0:00Speaker 00

  Hey everybody, it's Michael Martin. So a comment came in on another video about, do you have a pre-trade checklist? So the answer is yes, right? Because preparation is key. Victorious warriors, first win, then seek battle. Now, this might vary between trading styles. For example, if you're a short-term trader and you're looking for a catalyst, you're probably doing the pre-trade checklist aspect the day of the trades. That's part of my style, but I usually start the night before. I have an idea of where you want to get involved in a particular name. Things like position sizing, which could be number of shares, contracts.

• 0:44Speaker 00

  What is your risk? You also can take into account, where is your portfolio now? Like, what is in the portfolio? How is it doing? Are you coming out of a drawdown? I was just with my good friends, J.C. Parets and Sean McLaughlin, for example, in New York at the Portfolio Accelerator last week in Lower Manhattan. And we were talking about, you know, ultimately trading your equity curve in many ways. There's a lot of topics that come up, but someone was asking about, like, how do you manage the risk? How do you do this and that? And I think it was during Sean's presentation, he kind of opened it up for questions or comments. And I was like, you know, you could do very, very well for yourself if you just look at

• 1:28Speaker 00

  your equity curve and think of it as a stock. If you saw the chart of that in terms of, like, what is your equity doing over time? Does it look like a bullish breakout? Or does it look like it's channeling sideways? Does it look like it's breaking down and not necessarily a short, but an avoid? Right? So that you can kind of go to school on yourself, as we would say in the game of golf, and see, like, okay, is this the time to push? Is my equity curve going slightly parabolic? You know? And then reverse engineer that and say, okay, what is that? Why is that? Was I in the right place at the right time? Am I trading a hot sector? Was it a takeover? Was it an earnings announcement? Am I trading it too big? Right? Because there's a lot of reasons why things can burgeon.

• 2:13Speaker 00

  But at the end of the day, having that pre-trade checklist is a great way to be phenomenally prepared. So even though you might be a short-term trader and you're looking mostly at the day, right? Because what are the catalysts? News announcement, takeover type of a deal, upgrades, big new clients, cost-cutting measures? You know all the stuff. You can't really predict that stuff, so you need to have an entry criteria. But then, if the move is already underway, you would want to consider any number of continuation patterns. Because if you've missed the opening move, or if you don't really trade, say, in the

• 2:56Speaker 00

  pre-market, and that's where the thing is already up, say, 5%, you have to kind of... You remember when you would watch a sporting event and it'd say, afterwards, like, we now join our regularly scheduled programming that's already in, you know, has already been showing? So you missed the first 20 minutes. In trading, that can be problematic because you don't want to chase. So you kind of have to be prepared with a pre-trade checklist. Right? Try saying that 10 times fast. And, you know, what can you do then to be prepared when something already happens like that? Or, another way, you know, if you just haven't come into money in time, and so the moves are already underway, you have to kind of find a way to kind of catch up and get into

• 3:41Speaker 00

  a game that's already going. But position sizing, knowing what sectors are doing very well, what industries inside the sectors are doing well, that's all stuff that you can do, you know, beforehand. And, you know, knowing your max risk, being able to define what your portfolio heat is, and then understanding from more of a money management... I know we talked about money management, I think, Friday. Is like, okay, if I'm in a drawdown of XYZ percent, you know, when do I take the haircut on my capital? Right? Again, we'll talk about preparation here, because this kind of ties into a pre-trade checklist. It goes to your overall trading rules.

• 4:25Speaker 00

  Like, I know folks don't like to cut position sizes because they're in a very big rush or a hurry to regain the drawdown as fast as possible. And I want to go on record as saying, I think that's incorrect. That's not the issue. When you're in a drawdown, the goal is to stop the drawdown. You worry about making the money back afterwards. Now, you might feel differently, but even if you're hell-bent for election as a speculator and you're trading four times your capital during the day, your number-one job is to play superior defense. Right? And that can start even with saying, okay, I'm risking 5 cents to make $2. Right? At least you have a sense of the asymmetry. Even it could be 3 cents to make 30 cents. So 10 to 1.

• 5:09Speaker 00

  But that's all stuff that you would know ahead of time. Right? You'd have your chops. So the reason why you want to start thinking about taking a haircut is because, once you start getting down below 5 and approaching 10% drawdown, the numbers or the percent rate of return that you need to get your account back to that high-water mark, they start to grow. If it's single digits, it's not a big deal. Once you go beyond 10, you need 11. Once you need 15, right? Once you need 20%, now you need 25% to get back. And now you've got a lot of emotional pressure on you, as well as financial pressure. Right? Because if you think about it, if the market's been doing 9.6%, when you look at needing

• 5:53Speaker 00

  25%, you know, again, if you're trading extraordinary amounts of leverage, you know, more power to you. But you start to put a lot of pressure on yourself and a lot of pressure on your money to have to get back to break even. So I say, let's chop that in half into two steps. If you're trading $1 million and you're drawing it down to, say, somewhere between 950 and 900K, right? The first order of magnitude, right? The first call to action is to start saying, like, okay, I need to minimize my drawdown if I'm not going to cut my position size, and I want to make sure I take every signal because I don't know which one is going to ever, you know, stop.

• 6:36Speaker 00

  So, you know, figure out what that is for you. You can also cut your equity to, say, 400, 500K at that point and trade full risk units based on that haircut. This way, if you're still in a losing streak, you're going to lose less per trade, which isn't going to dig you into a deeper hole. Some of you might just want to bull through it and say, I don't care. I've traded 1% or 2% risk units, and I'm going to stick with that. It obviously is a very personal decision, but I can share with you this. The less you lose, the better off you're going to be. The less you lose, the fewer you would have to make in order to kind of get back to break

• 7:21Speaker 00

  even. You see? The less money I lose, the less I have to earn back. So, you know, you have to pay attention to that. That's one of the reasons why I typically start with very small positions and then nibble my way in, then reinvest my unrealized gains into my protective stop on the entire position. This way, I don't put on my full piece and take a massive hit. This also helps when you can't get the cleanest, you know, breakout. You can't get the cleanest cup and handle. You can't get the cleanest continuation pattern. Right? So you trade it smaller to give yourself more room for pullbacks or moves against you while you're letting the move kind of ferment. I'm not offsetting things typically by the end of the day. I'm taking risk home overnight.

• 8:06Speaker 00

  So it's much more kind of a minimal strategy to the overall financial aspect, as well as the emotional and psychological part of my trading. So all of that, you know, adds up. And that's what makes each trader's system kind of unique. But it all kind of starts with that pre-trade checklist in that it's really just the foray or the entry part of your overall risk management system on how you're going to do things. I like to be as prepared as possible, so I have a strong idea of what I'm looking at and what I'm looking for the night before. Otherwise, personally, I feel unprepared. I haven't studied it to say, like, did you ever not do it? Because I haven't done it any other way.

• 8:51Speaker 00

  We didn't have as much information when I started, so preparation was key. Very difficult, too. It was also very, very expensive to kind of try to figure out what I was going to do the day of because of the commissions and the fees. Although, anyway, this is all very personalized. There is no one way. Ultimately, though, you'll never feel bad about being over-prepared. Right? So incorporate that as much as you possibly can into what you want your pre-trade checklist, your pre-market, pre-open checklist, right? Because you should have all this done so that you're ready. And then also have rules like, okay, well, what happens if something happens intraday? Would that be considered a flyer? And how do you define flyers? Right?

• 9:36Speaker 00

  Anyway, there's more videos like this if you check in this list I've put together for you here. Don't forget to check out the link below. I'm putting together a trader cohort that's going to start shortly. Take care. See you tomorrow.