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Entry Strategies

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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