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Careful entry bridges the gap between
the setup and the trade. This is the
door through which you take on monetary
and emotional risk. There are many ways
to time the market, but three strategies
work for most swing trades. First, enter
a breakout or breakdown after it's under
way. Second, wait for a pullback and
enter near support/resistance. Third,
buy or sell within a narrow range before
the move begins. |
Which is the
best entry strategy for your next
trade? Unfortunately, the right
answer is never the same twice. Don't try to
render entry rules into simple repetitive tasks.
In truth, you need to plan each trade within the
context of the current market environment,
reward-to-risk ratio and chosen holding period.
This extra effort is a necessity, not a luxury.
Let's examine these three entry strategies. Over
time you'll learn how to pick the best one for
the trade you're ready to make. Keep in mind
that several different strategies might work
with the same setup. The right choice could have
more to do with intestinal fortitude than market
timing.
Buying a
breakout or selling a breakdown is the only
timing method employed by most
traders. Unfortunately, it's also
the best way to wash out of the markets. This
entry technique is simple. Your setup breaks
through support or resistance, so you rush in to
place a position. And then you pray.
This is a very risky way to enter the market.
The trade looks great when it moves in your
direction, but what do you do if it reverses and
takes off the other way? Amazingly, most folks
don't have a good answer to this important
question. So they freeze like a deer in the
headlights when faced with the reality.
Chasing momentum can work if traders choose
their plays wisely and pay close attention to
two important rules. First, always establish
your risk before making the trade. Choose a flat
stop-loss percentage, or use a pattern in a
lower time frame to signal when the trade goes
against you. Second, make sure the broader
market offers adequate support for your
strategy. Momentum
stocks benefit from momentum
markets.
What's your
rush? Many traders believe they're too late when
they stumble across a breakout in progress. In
fact, they're often too early. Many times you're
better off standing aside and waiting for the
market to reverse, rather than jumping in with
the crowd. Pullback entry is a very powerful
method because it uses the eager capital of
those who missed the first move. But the trick
is to get into the trade before they do, and let
their enthusiasm carry you into a profit.
Pullback entry is very price-sensitive. If
possible, place a
limit
order where you expect the
pullback to shift toward the breakout direction.
This is actually easier than it sounds. New
trends frequently return to prior
support/resistance before momentum finally kicks
in. So look at the chart and find where the
initial breakout took place. Pullbacks often
move to these important levels like magnets.
Narrow range
entry confuses many traders, but the theory is
simple. Common sense dictates the best time to
enter a new position is just before a breakout
or breakdown. Narrow range uses characteristics
of low volatility to identify when conditions
are ripe for a big move. The trader enters at a
tight price level and waits for a move to begin.
The advantage is that the position can be exited
for a small loss if the market breaks the other
way.
Congestion patterns, such as triangles, often
look like coiled springs. Paradoxically, this
wound-up appearance predicts the return of rapid
price movement. Traders can use classic
indicators, such as historical volatility, to
identify trigger points for this movement. But a
better way is to locate narrow range bars and
declining volume right at key support/resistance
levels. Enter the trade here while everyone else
gets ready to chase the breakout or breakdown.
