The Complete Pre-Market Routine: 4 Things to Check Before Trading

Many painful trading losses are not about the market being wrong. They come from a position that was twice the size the trader thought, a spread that was ten times normal, or a news release nobody checked. Those are checks, not predictions, and a short routine done before the first order catches most of them.

This article describes four checks. The wording is general because the details differ between brokers and instruments, and the point is the habit, not a particular platform.

Check 1: the instrument specification

Every instrument has a specification, sometimes called contract specifications or symbol information, which sets out how it trades. Read it the first time you trade a market and again whenever something might have changed. Forex pairs are quite uniform. Indices, metals, energy and single stocks are not, and the differences cost money when ignored.

The expiry line catches people out most often in commodity markets. Take CME Group's WTI crude oil future as an example. One contract covers 1,000 barrels, and the minimum price move is $0.01 per barrel, worth $10 per contract. Trading in a contract ends three business days before the 25th calendar day of the month before the contract month, and if the 25th is not a business day the cutoff moves one business day earlier. A rolling contract or a CFD based on a future may switch to the next month or adjust its price around that date, so look at how your broker handles it.

Contract sizes for a CFD on the same market can differ from the exchange contract, which is why the broker's own specification is the one that counts. For how swaps and the Wednesday triple charge work on forex, see the costs of opening and holding a forex trade.

Check 2: the spread and the margin

The spread is the gap between the buy and sell price, and it is a cost you pay on entry. It is not constant. It is usually tightest when the main sessions are open and widens in thin markets, around the daily rollover, at the weekend open and around major news.

If the spread is far wider than usual, the trade starts further underwater and a tight stop can be hit by the spread alone. The routine is to look at the current spread, compare it with what you normally see, and wait or reduce size if it is unusually wide.

At the same time, check your free margin. Margin is the part of your balance held as a deposit while a position is open. On a 1-lot trade in EUR/USD at 1.0800, the notional value is 100,000 euros, or $108,000. Assuming leverage of 30 to 1:

On a $10,000 account, that single position ties up 36 percent of the balance as margin, and a drop in equity reduces what is left for other trades. Leverage magnifies losses as well as gains, and the leverage and margin article covers position sizing in detail.

Check 3: scheduled events

Scheduled releases such as employment reports, inflation data and central bank decisions can move prices sharply within seconds, widen spreads and cause slippage on stops. They are published in advance, so there is no good reason to be surprised by one.

• Open an economic calendar and filter to the currencies and markets you trade today.
• Note the time of each high-impact release in your own time zone.
• For oil, add the weekly inventory report. For stocks, add earnings dates for the companies you hold.
• Decide in advance: stay out until after the release, trade smaller, or hold with a stop you accept being gapped through.

The articles on reading the economic calendar and trading the news cover what to check and how markets behave around releases. Also check for events that are not in a calendar: a holiday that thins the market, or a half day on an exchange.

Check 4: your open exposure

Before adding a trade, add up what you already have. The risk of each position is the distance to its stop multiplied by its size, and your total open risk is the sum of them. Positions that move together count as one bigger position.

Suppose you hold three trades, each risking 1 percent of the account: long EUR/USD, long GBP/USD and short USD/CHF. On the surface they are three trades in three pairs. In practice all three profit if the US dollar weakens and lose if it strengthens, so it is closer to one trade with 3 percent at risk.

Many traders set a cap on total open risk, such as 3 to 5 percent, and treat correlated trades as one. That cap is a personal choice rather than a rule. The point is to have a number, check it before adding anything, and stop if the next trade would break it. See how much to risk per trade for how to choose it.

Writing the plan

After the four checks, write the trade down before you place it: the instrument and direction, the entry, the stop, the target and the size. A plan on paper is harder to change in the middle of a move than a plan in your head, and it makes the review afterwards honest.

1. Specification: contract size, pip value, margin, hours, expiry.
2. Spread: current level against normal, and free margin.
3. Calendar: high-impact events in the next few hours and the day.
4. Exposure: open risk, correlated positions and what the new trade adds.

The routine does not tell you which way the market will go. It makes sure the trade you place is the trade you meant, at a cost you expected, with a risk you can survive. Trading on margin can lose more than you expect, and a routine does not remove that risk.

Sources: CME Group contract specifications for light sweet crude oil futures; spread, margin and swap mechanics as described in standard broker education material. Margin arithmetic assumes 30 to 1 leverage for illustration. Next in the series: Trend Following vs Counter-Trend and Statistical Pairs Trading.