Trading System: The Entry
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. 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.
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’s 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.
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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