Use this pre-trade checklist before committing to a swing trade in the stock market. The checklist helps confirm that you are taking a trade that falls within your strategy parameters, that your risk is controlled, that your potential profit justifies the risk.
As for trade selection, I like to find trades after the market has closed. I go through my stock screeners and find potential trade candidates. I narrow the list down to a few that I like, if there are any. Many nights there are no good setups, and I do nothing. Other nights I find a few. I write them down, and then go do something else. A few hours later I come back with fresh eyes, look at my candidates again and see if I still like them. If the charts still look good to me, and they agree with my checklist, only then do I proceed with the trade. I don’t take swing trades after only looking at a chart once. It is too easy to get impulsive.
With that said, let’s check out the pre-trade checklist for swing trading stocks. Note that the checklist is based on the strategies I use. I am primarily a trend trader, focusing on buying after the price starts moving in the trending direction again after a pullback (see this trend channel strategy for an example), or trading chart patterns.
For a full course on swing trading, with additional strategies, see the Stock Market Swing Trading Video Course.
Pre-Trade Checklist for Swing Trading Stocks
- If taking a long, is the price in an overall uptrend? It may be in a pullback, but the overall trajectory must be higher overall: high swing highs and higher swing lows. If taking a short position, the price should be in an overall downtrend.
- If taking a long, the uptrend should be stronger than the major index (S&P 500 for example). We want to trade very strong stocks (longs) or very weak stocks (shorts). I am not interested in stocks that don’t really move much.
- Does the swing trade meet my entry parameters based on the strategies I have laid out in my trading plan?
- If earnings are coming out in the next few days, decide if you still want to proceed with the trade or skip it. Earnings can cause price gaps, which may mean you end up losing way more than you expected…even if you use a stop loss order.
- If there a reasonable place to put a stop loss? If going long, this will typically be below the most recent swing low or consolidation low. If going short, it will be above. Ideally, the stop loss location is within 5% to 10% of the entry price, for most stocks. For example, if entering long at $10, the stop loss is between $9.50 and $9. For most stocks, risking 10% is the maximum, because that means the stock has to move up 20% to gives us a 2:1 reward to risk. The exception is if the stock is very volatile, and routinely moves 50%+ on its price swings. In that case, I may allow my stop loss to be 15% or 20% away from my entry point.
- ADJUST POSITION SIZE ACCORDINGLY….not every trade has the same position size. The bigger the stop loss, the smaller the position.
- Based on the position size and stop loss, the risk exposure is less than 2% of my trading capital. Ideally, less than 1%, especially if a new trader.
- Estimated profit potential is at least 2x the risk. For example, based on prior price patterns and how the stock has moved out of prior trade setups (even if you didn’t trade them), it is reasonable that the stock can easily achieve a price target that is two times the size of the risk. For example, if buying at $10, and placing a stop loss at $9.50 (risk 5%), you can reasonably project based on volatility and prior price moves that a move to $11+ (10%+ gain) is likely.
- Risk/reward is only one way to exit and analyze a trade. Plan your exit BEFORE you get in the trade.
- Look for additional confirmations of your trade direction. For example, if going long, I really like to see a false breakout to the downside prior to my long entry. It shows the price tried to drop and couldn’t, which helps add fuel to an upward price thrust.
- Before placing the trade, double check for earnings, your order types, position size, order prices, risk, risk/reward, and rehearse your exit plan.
Pre-Trade Swing Trading Checklist Final Word
The important thing is having a checklist of your own! Use mine to build off of, or create your own based on your strategies and ways of trading. This checklist is designed for the way I trade, and may not suit everyone. Before a checklist is useful, you first need to have clearly defined strategies. Our checklist(s) and our strategies work together to help produce a profitable edge.
By Cory Mitchell, CMT