Trading System: The Entry
Entry Strategy – is about when and at which point you will enter a trade. It is important to get timing right while keeping losses small even if the trade fails to progress as planned.
Many traders fret about picking the perfect entry, often associated with picking the bottom of the market. This is impossible to do, at least with any consistency. The great thing is that it does not matter, as the entry is not as important as most people think. It is best to keep it simple and easy to follow. Still, you want to make a good job of it, so I would suggest looking at these alternatives and picking the one that suits you.
You can time entries using technical analysis; for instance you could enter a market on
- breakout of a recognized chart pattern
- breakout of significant resistance
- pullback to support after a strong breakout
- pullback to strong support after a rally
If you’re developing a trend following system, then moving averages will give you a good indication of a trend having started. You can choose single, double, or triple crossover methods, whichever appeals to you. Another idea is to find a security that is trading at its recent high, perhaps by seeing if the highest price in the last 200 days has occurred in the last three weeks, as this indicates it is in the process of going up.
You can also look at countertrend movement, and try to trade for the reversal. For instance, if the security shows good support and resistance, you can buy long when the price drops to the support level in anticipation of the bounce. You can apply the same principle to trend lines. Another way is to watch the retracement of a trending stock, and be ready to make an entry at the first sign of a turn at the 50% level.
An alternative is to pick an oscillator, decide at what level it indicates overbought or oversold, and include in your system what value this has to be for you to consider it a reversal point. You should usually look for confirmation from a separate indication, so you could also include price patterns or candlestick patterns that you want to see before entering a trade.
You may wonder why I said above that the entry is not as important as most people think. I always remember the example given by Van Tharp in his book Trade Your Way to Financial Freedom, when he described a random entry trading system which made money because of a simple 1% risk money management system which was strictly applied. To repeat, the stocks were selected at random, and traded long or short depending on a coin toss. Good money management, cutting losses quickly, meant that the ‘system’ still made a profit! This serves to emphasize the importance of good money management and disciplined trading, and shows you should not fret too much over finding a ‘perfect’ entry.
So, there is no such thing as a perfect entry signal, as you will find if you speak to any successful traders. You do not need to undertake a detailed search for the perfect signal, and be frustrated that you cannot find it. Applying any of the common sense factors listed above will increase your chances of being right in the trade, and it is true that the entry is the time when you have complete control, whereas your exit from a trade may be forced by circumstances.
Common sense also dictates that you should look for confirmation and include it in your trading plan. This is the best way to increase the odds. Confirmation may be as simple as waiting for the price to move in your direction if you are trading on an expected reversal, or will be looking for confirming indications from other technical factors, such as oscillators showing overbought or oversold conditions.
It can help to think about your entry as requiring “triggers” and “conditions”. The condition may be for example that the stock is trading above its 20 day simple moving average and has been doing so for the past week. Unless this condition is fulfilled, you will not even be interested in triggers. The trigger is then given by something like the moving average crossover, a breakout to a certain level, a candlestick pattern, or whatever you choose to use. Once the condition is satisfied, you will act as soon as you see the trigger.
There are a countless number of trading opportunities every day, although many of them may not suit your particular trading style and risk profile. The real work of the entry selection is to avoid taking most of them and selecting only the ones that will suit you.
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