Your entry decision is an important decision, however in the scheme of things, it is one of the least important.
Did you read that correctly? Yes – your entry decision is one of your least important decisions that you make.
At the very least, your position sizing and your exit decision are FAR more important.
Your decision to enter a trade is one of the first decisions you make when trading. However, it is also one of the least important.
Many people believe that if they spend most of their time determining an appropriate entry signal and making the decision to enter, they increase their chances of having a profitable trade. This seems to make sense to new traders.
In trading, there are some time-tested rules regarding entry. The simplest of these is to ‘follow the trend’; that is, trading with the general direction. Extending from this premise is an infinite number of possible entry signals, but I do not have the space here to list every one of these with an accompanying explanation.
I firmly believe that there is no perfect entry signal, and many of those who trade successfully believe the same. Do not do what most people do and undertake a determined search for the perfect entry signal – you are going to be sorely disappointed. Using technical analysis to judge entry points, in my opinion, really just increases your chances of being right in the trade – it helps you identify high probability trading opportunities.
The two biggest problems people have with their entry signal is a lack of consistency and it being too complicated. Let me explore these areas first before providing some more specific guidance on how to define your trading strategy and entry rules.
Consistency is one of the most important traits of traders — consistency in the execution of their trading plan from entry to position sizing to exiting.
I believe that most traders trade randomly. In other words, they will look for trading opportunities indiscriminately without any process or methodology. They will stare at a chart and see if something pops up. Even if they have to stare at it for a few minutes, they will keep looking until they find something. We also find ourselves very interested in other people’s opinions because it gives us a reason to look at a chart.
One trading opportunity might appear because the chart looks similar to one that was seen in a trading book that someone read on the weekend. Off they go to find the book and flick through it looking for that chart…there it is, page 123. The chart they are presently looking at almost resembles the chart in the book and that author said you should trade it, so they do. Even though they have never traded for that reason before and may not ever again.
This is not consistency, but is a terrible way to look for trades.
I always talk to people about my three C words with trading: consistency, comfort and confidence. Comfort in the level of risk you take with trades, confidence in yourself, your own ability and your trading plan, and consistency in your whole approach.
When I look at a chart, I could tell you within a second whether it is a likely opportunity or not. Why is that?
I know exactly what my strategy is and why I will enter a trade. I know exactly what it looks like on a chart, because I have seen it thousands of times.
What I want you to do is commit to mastering one trading setup and then executing it with great discipline and consistency. Take a mental picture of what your perfect setup looks like and burn that template into your mind. This will ensure that when you see a chart that doesn’t match your template, you are able to eliminate it quickly.
I don’t like to compare trading to gambling, although many people think that trading is exactly that; however, let me talk about consistency from a casino’s point of view. Let’s use the example of a roulette wheel.
As the roulette wheel and table include a zero and in some cases also a double zero (00), the odds are slightly tipped in their favour. The presence of the green squares on the roulette wheel and on the table are technically the only house edge; however, that is all they need. The casino has an edge and they apply that edge with absolute consistency over an extended period of time.
For example, if you place a bet on one of the numbers, your payout is 35 to 1, i.e. 35 times your bet. However, the odds of you winning are 1 in 37 (assuming no double zero). Outside bets (i.e. if you place a bet on 1 to 18, 19 to 36, red or black, even or odd) will always lose when a zero comes up.
Do they make money every time the white ball is released onto the spinning roulette wheel? Of course not. However, over time, do they make money? Absolutely they do. They have a set of rules which they know work and gives them an edge, and they apply those rules with absolute consistency – no exceptions! Casinos are the greatest exponent of consistency and we all know how well they do.
You need to strive for the same level of consistency where you place the odds in your favour. Trading randomly and using a variety of different entry setups does not come close to achieving this. You will end up on a never-ending journey of moving from one strategy to another to the next and so forth.
Being consistent means that when you see a potential trading opportunity that no longer meets your entry rules, you don’t trade it. It doesn’t matter if it is a classic break higher from an ascending triangle or the perfect moving average crossover that you read about on the weekend. If it doesn’t meet your entry conditions, move on.
I am not ashamed to admit that my trading style is a little boring, mainly due to this level of consistency; however, I am very comfortable with that tag. I have always said that trading won’t deliver a great rush of excitement for the majority. If you want to feel exhilarated, jump out of a plane. I don’t think trading will provide it to you.
I know for a lot of people who start out and want to trade stocks, they struggle with identifying potential trading opportunities. They consider that there may be thousands of stocks listed on the stock exchange and don’t know where to start. This can be a daunting experience.
One thing that greatly assists me with consistency is using software to filter out all those stocks that don’t meet my criteria, leaving me with a small list to manually scan through. This is a great time saver for me but it also greatly assists with the consistency, as I don’t even look at a chart unless it has met my conditions.
I think this is one of the most valuable things a piece of software can provide. Many online trading services offer basic charting functionality, but one of the tools that separates dedicated trading software from many online services is the ability to scan through thousands of securities very quickly, therefore providing you with a small list rather than thousands.
Having said that, some traders don’t need such a tool if they are focussing on only a few items to trade. For example, forex traders may trade less than 10 currency pairs and therefore they don’t necessarily need the ability to sort through all that data, they can easily look at 10 charts within minutes and identify any trading opportunities.
This section has much more material to be added to it … however at this point in time, consider the following.
Whichever form(s) of analysis you use to consider your entry, it boils down to only assisting you in entering a high probability trade – the trade that has a high probability of being profitable. There are simply no certainties in trading. The best advice with your entry signal is to keep it simple!
This article will, in due course, consider further items such as, but not limited to:
- technical indicators,
- fundamental data,
- sector analysis,
- trade initiation,
- weight of evidence,
- managing information,
- what financial products you will trade,
- your time frame for trading, and
- using a checklist.
What Can I Do for You?
I have written detailed market commentary of equities, foreign exchange, indices and commodities for several leading brokerages around the world. I offer detailed technical analysis providing a real traders perspective on price action, trends and key levels in order to assist clients make more informed decisions.