Your pre-trade risk checklist6 questions to answer before you click.
Before every trade, professionals answer 6 questions: the risk events, the release that could kill the idea, the mood, the crowd, the scenarios and the alerts. Written in your journal, they take a few minutes.
Why professionals trade plans
What the market rewards is being positioned for what is coming, however clean or messy your chart looks. That is why professionals run the same short checklist before every trade. It pulls together this whole module: the 4 threats, the scenarios and the preparation that keeps you calm once you are in.
There are 6 questions. The first 4 check the risks around the trade, and the last 2 prepare your response. None of them takes long, and skipping one leaves a blind spot.
0 of 6 checked
The calendar and the killer release
Question 1 asks which risk events are due while your trade is open. Start with the Economic Calendar and look for high-impact releases such as inflation, central bank meetings and jobs data. If any of them fall before or during the life of your trade, build scenarios for them or adjust your size.
Question 2 goes a step further: which data could directly kill your idea? Say you are long EUR/USD because you expect weaker US inflation. Then core PCE, the inflation measure the Fed is known to favour, is a direct threat. If it comes in hot, the reason for your trade is gone. If you cannot name the release that would break your trade, your homework is not done yet.
The mood and the crowd
Question 3 is about sentiment. Know which mood the market is in. In a risk-on mood, stocks rally and fear gauges fall. In a risk-off mood, bonds rally and fear rises. Then check whether your trade fits that mood. If it does not, you are either trading against the trend or early, so ask whether you can handle the drawdown, how far the trade may move against you before it works.
Question 4 asks whether the trade is crowded, the positioning threat from the lesson on the 4 threats. Check COT positioning for both currencies. If funds are already maxed out on the same side as you, reduce your size, or wait for a cleaner setup.
Your scenarios and your alerts
Question 5 asks for your top 2 or 3 scenarios, built as in the lesson on scenario planning, and your response to each. Write every response as an action, such as reduce, add or exit, so there is nothing left to decide under pressure.
Question 6 is practical: have you set your alerts? Put price alerts on your key levels and reminders on the release times. If a number comes out at 2:30, be ready at 2:25, so you are already watching when it lands.
Put it in the journal
Write your answers in your Trading Journal before you click: the idea, the catalyst, the risk events, the data threat, the mood, the positioning, your scenarios and your alerts. Writing it down sharpens your thinking and keeps emotion from taking over once you are in the trade.
It does not need to be long. It needs to be intentional. The example below is a short GBP/JPY trade. A checklist like this will not make every trade a winner, but you will always know why a trade worked or failed, and that is what you can learn from.
Dovish Bank of England, risk-off flows
Bank of England speech Thursday, US inflation Friday
Hot US inflation lifts the dollar and could spill into the mood
Risk-off: volatility up, US stocks weak
Funds net long the pound, so an unwind could be large
Dovish speech, soft inflation: stay short. Neutral speech, hot inflation: cut. Risk-on: tighten the stop.
Inflation Friday at 2:30, yen crosses at key levels
In short
- Run 6 questions before every trade: risk events, the killer release, the mood, crowding, your scenarios and your alerts.
- If a release could break the idea, plan for it or adjust your size. If the trade fights the mood or the crowd, reduce your size or wait.
- Write the answers in your journal before you click. It does not need to be long, only intentional.
Questions
Do I need all 6 questions for every trade?
Yes, but the answers can be short. In a quiet week, question 1 may take a few seconds. What matters is that you looked.
What is core PCE?
A US inflation measure based on consumer spending that leaves out food and energy prices. It is often called the Fed’s favourite inflation measure.
Key terms
- Economic calendar
- A schedule of upcoming data releases and central bank events, with forecasts and previous values.
- Drawdown
- The drop from the account’s highest point to its lowest point before it recovers. A 50% drawdown needs a 100% gain to get back.
- Positioning
- How traders are already invested. When everyone is on the same side, there is no one left to push price further.
- Scenario planning
- Deciding in advance what you will do in each likely outcome of an event, before the event happens.
- Catalyst
- An event that can set a move in motion, such as a data release, a central bank decision or a speech.