|Many folks believe good chart-reading automatically
leads to profitable trading. Unfortunately, this isn't
true. While technical analysis and trading are
interrelated skills, chart-reading requires no capital
or emotional commitment. In contrast, real-life trading
places both of these elements at risk in an unforgiving
||I publish hundreds of trade setups each month. But none
of these ideas will put money in your pocket without
good timing. It's a critical error to enter a trade just
because it has a pretty chart. The opportunity comes
only when you can discover and capitalize on the setup's
|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.