Mental Checklist Before Executing

Mental Checklist Before Executing a Trade

This guide provides a structured mental checklist for beginners looking to connect their existing Spot market holdings with the use of Futures contracts, specifically for basic risk management like partial hedging. The key takeaway is to approach every trade with a clear plan, acknowledging potential risks before committing capital. Trading safely means prioritizing capital preservation over chasing quick gains.

Step 1: Assess Your Spot Holdings and Define the Hedge Goal

Before opening any futures position, you must understand what you own and why you are using futures. Are you looking to profit from a specific move, or are you trying to protect your existing assets? This forms the basis of Spot Holdings Versus Futures Exposure.

**Review Spot Assets:** Know the exact quantity and current cost basis of the cryptocurrency you hold in your Spot market.
**Determine Hedge Ratio:** For beginners, full hedging (where you short an equal amount to what you hold) can be complex. Start with Understanding Partial Hedging Benefits. A partial hedge means only protecting a fraction of your spot holding against a potential downturn.
**Define the Trade Type:** If you hold Bitcoin (BTC) spot and fear a short-term drop, you would open a short futures position. If you have cash and want to profit from an expected rise without buying spot immediately, you would open a long futures position.

Step 2: Establish Risk Parameters and Sizing

Risk management must be set before entry. Never enter a trade based purely on emotion. This involves setting hard limits for loss and profit. See Defining Your Maximum Risk Per Trade for more detail.

**Set Stop Loss:** Determine the exact price level where your trade idea is invalidated. This is crucial for Setting Stop Losses for Futures Positions. Remember that leverage amplifies losses rapidly; understand The Danger of Overleveraging.
**Set Profit Target:** Decide where you will take profits. This aligns with Setting Clear Profit Targets.
**Calculate Position Size:** Use conservative leverage. For beginners, keeping leverage low (e.g., 2x to 5x maximum) is vital when first learning Using Futures to Offset Spot Declines. Your position size must reflect your risk tolerance.

Step 3: Technical Analysis Confluence Check

Indicators help provide context, but they are not crystal balls. They should confirm a hypothesis, not create one. Always review the broader context using resources like How to Analyze Market Trends Before Entering a Futures Trade. This section covers Combining Indicators for Trade Entry.

Using Momentum and Volatility Indicators

**RSI (Relative Strength Index):** Check if the asset is extremely overbought (suggesting a potential pullback) or oversold (suggesting a potential bounce). Be cautious; in strong trends, the RSI can remain high or low for extended periods. Use it to gauge the *speed* of the current move, not just the direction.
**MACD (Moving Average Convergence Divergence):** Look primarily for histogram growth (increasing momentum) or significant crossovers of the MACD line and signal line. Crossovers can be lagging, so confirm them with price action. Review MACD Crossovers for Trend Confirmation.
**Bollinger Bands:** These show volatility. A price moving outside the bands suggests high volatility or an extreme move, but it is not an automatic reversal signal. Look for the bands to squeeze (low volatility) before a large move, as detailed in Bollinger Bands Volatility Context.

When using these tools, always check multiple timeframes. A short-term buy signal on a 5-minute chart might be irrelevant if the daily chart shows a strong downtrend.

Step 4: Psychological Readiness and Contingency Planning

This is often the most overlooked step. A perfect technical setup can fail due to poor emotional control. Reviewing your plan helps prevent Revenge Trading Cycle Avoidance.

**Check Your Mindset:** Are you entering because the setup meets your criteria, or because you feel you "missed out" (Fear Of Missing Out or FOMO)? If you feel anxious or rushed, step away.
**Review Stop Loss Logic:** Are you mentally prepared to accept the loss if the stop is hit? If the answer is no, your position size is too large or your conviction is too low.
**Plan for Slippage:** Especially during fast moves, the price you see might not be the price you get. Factor in potential Managing Slippage in Fast Markets when setting profit targets and stop losses.

Practical Sizing and Risk Example

Let's consider a simple partial hedge scenario where a trader holds 1.0 BTC spot and is concerned about a short-term dip. They decide to hedge 50% of their holding using a BTC/USD Futures contract.

The trader decides to use 3x leverage on the hedge trade, which is a conservative approach to Setting Initial Leverage Caps Safely.

Parameter	Value
Spot Holding (BTC)	1.0 BTC
Hedge Target (Partial)	0.5 BTC equivalent
Current BTC Price	$30,000
Chosen Leverage	3x
Required Futures Contract Size	$15,000 (0.5 BTC * $30,000)
Margin Required (at 3x)	$5,000 ($15,000 / 3)

If the price drops to $28,500: 1. The spot holding loses value ($150 loss on the 0.5 BTC portion). 2. The short futures position gains value (approximately $150 gain, depending on exact entry/exit points and fees).

This scenario demonstrates Simple Hedging Example Scenario A—the loss on the spot asset is largely offset by the gain on the futures contract, protecting the majority of the portfolio value from immediate volatility. This is a core concept in Balancing Spot Assets with Simple Hedges. Always review your Scenario Planning for Market Moves before execution. For more on setting up your tools, see Essential Tools for Successful Crypto Futures Trading: A Beginner’s Checklist.

Final Review Before Clicking Confirm

Before executing the order, ask these final questions:

1. Does this trade align with my overall strategy for my Spot market holdings? 2. Is my stop loss definitively placed and accepted? 3. Have I accounted for potential fees and slippage? 4. Am I trading based on the plan, or based on recent price action noise?

If you are unsure about any step, revisit your research, perhaps by reading What You Need to Know Before Trading Crypto Futures. Do not proceed until you have a confident, documented plan. Remember, successful trading is often about the trades you *don't* take. If you are considering buying more spot after a drop, review Spot Buying After a Price Drop.

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Mental Checklist Before Executing

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