Choosing
Entry Strategies - Defining Strategies
For Success
Entry
strategies (or “Entry Timing”) are often
a hit and miss type of this. It would
be great if we could always know when
and where to get into a trade, but that
is not the case. We, as professional traders,
have to attempt to time our entries and
use our best judgment to determine if
the trade we are about to take is our
best opportunity. Even then, before we
get to the point of executing the trade,
we should have gone through all of the
“Components Of A Good Trade” (Section
1.3). There may be better opportunities
out there still.
When
choosing your entry strategy, consider
the following before you decide…
1.
Is it critical that you enter your trade
right now?
2. Is there a potential for any type of
pullback in the future?
3. Have you checked with other stocks
in the same sector for further confirmation
of this trade?
4. Are the general market conditions strong
enough to help carry this trade, or do
they present a potential problem?
If
the answers are as follows, then ask yourself
the additional questions….
1.
YES. What makes you believe it is critical
that the trade be executed NOW. Is there
any news or potential earnings report
that is due, or do you believe it is just
perfect timing. Either way, do as much
research as you can and try to better
confirm your decision.
1. NO. If your trade does not need to
be executed RIGHT NOW, then look into
the chart (and others) to try to identify
an expected pullback level – a level where
you would feel comfortable executing the
trade. You should also identify a “Breakout
Level” where you would execute a potential
trade if the market breaches current resistance.
In other words, try to identify what conditions
and prices would cause you to execute
the trade when/if they happen.
2.
YES. Where do you believe the market will
find support or resistance? Look at recent
highs and lows for guidance. Use the Fibonacci
levels as a further indicator of the potential
pullback. Try to identify the best (most
strategic) strategy without hoping for
the impossibilities. It is more likely
that the stock may pullback a bit, but
not to the extreme levels.
2. NO. If this is the case, then you should
consider your entry trading strategy right
away. Where would you place a stop? What
is the potential risk/reward ratio? What
is your initial profit target and “What
do you do if your are wrong”? Don’t chase
a trade, plan it. Sometimes, wisdom and
waiting are the best strategy.
3.
YES. Do any of the other charts you looked
at help confirm your analysis or do they
make you more confused? It is not always
the case that sectors move together. Sometimes
one or two stocks in a sector may move
against the trend of the others. These
strong stocks may be reflecting some fundamental
difference or market leadership/weakness
capabilities. If you can find any historical
base for support or resistance on the
charts and the price action warrants some
action, then you need to do your homework
and investigate all the possibilities.
Study the technical indicators and the
news items about this chart. If all looks
good, then plan your entry strategy.
3. NO. Go back and look over a few other
charts in the same sector, maybe even
the sector index, for signs of strength
or weakness. It is not critical that all
stocks in a sector move the same direction
at the same time, but if you can find
one stock that looks like it might go
up in a sector, there are probably one
or two others in the same situation. Generally,
review your options and review the general
market conditions before entering any
trade.
4.
YES. Great. Plan your trade. Identify
your stop loss level and remember to include
your “What if I’m wrong” plan.
4. NO. If the general market conditions
do not look good to you, then often your
best choice is to WAIT for a better trading
condition. Remember, you can’t loose money
if you don’t trade – right? The other
side of the coin is to put into place
a trading strategy for short-term gains
with very limited losses. If you feel
compelled to execute a trade even though
your gut is telling you not to, review
everything and you MUST establish a STOP
LOSS level to protect yourself as well
as a profit target. Don’t let yourself
get caught up in the emotional side of
trading (hoping something will go up when
it doesn’t).
After
you have answered these questions and
completely gone through the Components
of a Good Trade, then you are ready to
move on to the different types of entry
strategies. So here we go….
Types
Of Entry Strategies
“Market
Order” Entry
- A market order allows you to execute
your trade at or near the current market
price. It is normally executed within
seconds of your placing the order (unless
the market you are trading is very thinly
traded). This type of order does not allow
you to specify a target entry price –
you normally get within near the ask/bid
spread. Most traders should always place
a stop loss order to protect from unwanted
losses when placing any type of market
order. Also, there is no need to place
a GTC (Good Till Cancelled) market order
as this order type will typically be executed
and filled almost immediately.
In
this example, a buy signal was issued
(as shown) and if a trader had placed
a market order before the opening of the
next session, it would have been filled
at (or near) the open of the following
session.
A
protective stop would have been suggested
by the PFP program near $39 when this
signal was issued. This stop level would
have been adjusted in the following sessions
higher and higher (as the lows continued
higher), until it was finally stopped
out near $42.00.
This
second example is a sell signal market
order. As you can see, the exact same
situation occurred where the market order
was executed at (or near) the following
sessions opening price. This is normally
the case unless traders execute the market
order during a trading session. In the
later case, the market order would be
executed at (or near) whatever the stock
is trading at when the order was placed.
In
most cases, with the PFP software application,
you will be placing orders after the market’s
close, or before they open for the following
sessions trading activity.
Another
interesting thing to not here is that
on the BUY example, the entry (or order
filled bar) did not retrace much into
the previous candle’s body. This might
lead us to believe that for this stock,
with large range candles that execute
a buy signal, we might not expect must
(if any) retracement. Thus, not allowing
us to use a limit order to time our entry.
Where as in the SELL example, the following
session (after the sell signal was issued)
retraced nearly 50% of the previous candles
total range. This might allow us to better
time our sell orders.
“Limit
Order” Entry
- A limit order allows you to execute
your trade at or near a specific market
price. In the case of Limit Orders, once
the market breached or meets your price
level, the order is executed – not before.
This gives you the opportunity to set
a specific entry price level (assuming
the market actually reaches or breaches)
that level.
When
placing a limit order, be sure to state
“LIMIT ORDER to BUY (or SELL) at $xxx.xx”.
Most of you will be placing orders electronically,
thus you won’t have to worry about how
to state the order. But for those who
still call their brokers, if you make
a mistake placing your order, it could
come back to haunt you.
Another
important facet of the limit order is
that it can be issued for only a single
trading session, or it can be issued as
a GTC limit order. If you place a GTC
limit order, the order will stay active
until either a) the order gets filled
or b) you cancel the order. So be aware
that you have to stay on top of the orders
that you have placed. Traders should never
issue GTC orders, then forget about them
or ignore them. Those orders will stay
active until they are filled or cancelled
– and you are liable for the order.
Example:
Limit Order Using Fibonacci Levels while
expecting a pullback
In
this example (a Daily CSCO chart), let’s
say our trader found this sell signal
by tracking the Weekly chart, but expected
a price pullback after the initial downside
move. Our trader would use the Fibonacci
levels feature of the PFP program to calculate
the retracement levels of the most recent
sell-off range.
Upon
setting, calculating and plotting the
new Fibonacci levels, our trader would
know that the most logical entry points
would be 42.45, 42.89, 43.33 or 43.82.
These levels are shown below in the PFP’s
Fibonacci window.
Based
on the Fibonacci levels, our trader would
know that the market will likely NOT breach
the highest level ($43.82) and if it did,
this would mean that it could attempt
to reach the highs again. So a safe stop
would be just above the $43.82 level.
Also, our trader would be able to choose
which entry level would best suit his
investment style. As you can see, all
of the price levels were breached at some
point during the pullback, but the $43.82
level held and the market began selling-off
again.
As
a professional trader, we would want to
get the best entry price possible, but
not actually knowing where the market
would go in the future, we would simply
choose an appropriate level. I tend to
stick with the 50% or the 61% retracement
levels.
In
the event that we are unsure of the future
direction of this chart, we might choose
to wait and see what the market does at
these levels, then execute our sell order
when/if the market breaches the 38.2%
level. This way, we are simply trying
to execute our sell order (market order)
when the market attempts to sell-off below
the 38.2% level and not before.
Example:
Limit Order while expecting a Breakout
Sometimes,
like I stated earlier and of often, it
is wise to wait and execute your trades
when
the conditions are right. In this example,
the market has been rising within a fairly
well defined trend channel and a new candlestick
SELL signal is issued. As professional
traders (and using the Components of a
Good Trade), we soon realize that the
actual downside profit target is the lower
support channel (only $0.20~0.25 from
our current close). There is really not
much opportunity here unless the lower
trend channel is breached. Then we have
a much greater potential profit target.
In
this case, we decided to place a SHORT
LIMIT ORDER to be executed when the trend
channel was breached (at or near $44.10).
We would have placed a GTC cover STOP
order ABOVE the support channel as soon
as our limit order was filled. This would
have limited our risk to only about $0.40~0.50
once the trade was filled.
The
reason we choose to lower the limit order
price a bit simply because we wanted to
only execute the order if the market price
breached the support channel substantially
enough to warrant a potential bearish
trend move. Remember, if you are expecting
a breakout to occur, be sure to exercise
caution when placing your limit orders
and limit order price. Make sure to gauge
the market’s ability to breach the level
sufficiently before executing the entry
order (often about 10% of the channel
range).
In
this case, the trade worked in our favor
and we realized a $3 profit in only 4
days.
Example:
Limit Order Trading within a Trend Channel
Trading
within a trend channel requires the adaptation
of both of the entry strategies we have
discussed so far. We not only use the
bottom/top reversal market order strategy,
we also use the breakout strategy.
A
trend channel is often a very profitable
scenario for a trader. It means that the
market is moving within a defined range
of price. All we need to help define the
channels are two defined peaks (to define
the upper channel) and two defined valleys
(to define the lower channel). As we’ll
explore in this example, most trend channels
move in nearly parallel lines. So once
we have defined the first trend channel
level, the second level will most likely
be parallel (or nearly parallel) to the
first.
Channel
Trading System
The
chart above shows the defined trend channel.
The double-blue lines show the two peaks
and two valleys used to define the trend
channel. The red arrows show illustrated
areas where we could consider SHORTING
the market after it breached the upper
trend channel and the green arrows show
illustrated areas where we could consider
BUYING the market after it breaches the
lower trend channel. Using LIMIT ORDERS
to execute these trades are simple. We
simply wait for the market price to breach
the trend channels, then place our GTC
LIMIT order to BUY or SHORT the market
a our specified price. The other condition
I might add is that if the order has not
been filled after 2 or three days, you
might consider canceling the order as
a precautionary tactic.
The
best way to trade a channeling market
is to wait until the upper or lower is
breached, then identify a price level
within the trend channel that has occurred
within the most recent 2~5 days that would
reflect a “re-entry” of the trend channel.
Essentially, waiting for the market price
to re-enter the trend channel before executing
the trade. This provides us with the ability
to trade a trend that is moving in the
direction we want and moving toward our
profit target – the opposite trend channel
level.
As
with any type of lengthy chart pattern,
trend channels often require 20~30+ days
of price action to define the channel
levels. So this means that until the trend
channel levels are clear, we will be trading
with entry strategies we already know.
Although, once you believe you have identified
a trend channel, there are a few things
to be aware of…
1.
Market price will often move above and
below the defined trend channels. This
is common as market price will attempt
to “scout out” price levels outside the
trend channels.
2. A middle trend line is often drawn
between the upper and lower channel levels.
This middle line is often used as a gauge
of market trend strength. If the market
price stays above the middle line, then
it should attempt to move higher. The
opposite is true if the market price is
below the middle line.
3. Don’t try to buy bottoms within a trend
channel or sell tops. The smart trade
is to trade the reversal acceleration
as the market price bounces from channel
to channel. This means that either limit
orders or market orders should be used
after market price has tested the channel
boundaries and has begun to bounce off
of these levels.
4. Remember, by definition a trend channel
is meant to be broken. So, if you find
a trend channel and begin trading it,
be aware that at some point, the channel
will be broken.
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