How to Enter Trades at the Right Time
One of the hardest parts of trading is execution. While you can learn to identify trade setups, actually executing them is a different game. We went over the three steps to take before every trade:
The steps are setup, confirmation, and execution. Confirmation is a critical step because if you enter too early or late, your trade won’t be good. Getting in at the right price and risk/return ratio is all that matters. Even if you have the right idea, it won’t mean anything if it doesn’t become a real trade.
Now that we understand the importance of timing and confirmation, let’s dive in. A key concept to understand is that each moment that passes on a chart represents a trade-off between opportunity and information.
Let me explain:
Let’s say you’re a pullback trader. Your job is to buy dips. The chart below is an example of an uptrend and the price has pulled back. This is your type of trade, you just need to find out how and when to enter.
So when do you enter?
Here, you have the least amount of information and the most opportunity. It might not keep dipping and immediately go up. In this case, you’ll need to enter at a higher price and miss a large part of the move. It may also crash down and you’d be glad you didn’t take it yet.
We don’t have a lot of information to point us in either direction. It could work, or it could not. If you were to enter here, you could place your stop just below the previous high, and place your profit target where you expect the next move to end.
Keep in mind that you’re trying to “catch” the right spot. There is nothing telling you that it’s going to stop going down at this exact price.
Let’s say you want a little more confirmation instead. You wait and see that price finally stops going down and reverses. It moves up quickly with a lot of momentum, which is exactly the kind of confirmation you were looking for.
You can now enter the trade. Your stop loss and profit target are the same as before, except now your stop loss is larger and your profit target is smaller because you got in at a higher price.
In this case, you’ve traded more certainty for less opportunity. There is a better chance of price going up, but you’re going to make less profit with it. Lower risk/return.
It’s like watching the World Cup match where you can place your bets at any time during the game. If you bet on a team at the beginning, you’ll be well-rewarded if they win the game. The odds are fair and someone is willing to bet against you since the outcome is uncertain.
If you bet on a team in the middle of the game and they’re clearly winning, it won’t pay out as much. The outcome is more predictable. Your team can still lose, but the odds are on their side. People are less willing to take the other side of the bet.
The same goes for trading. If you buy after price made a huge move up, you won’t make as much profit because the big move already happened. Your “side” (buyers) are already winning.
There isn’t a clear answer as to which is better.
Some traders would prefer having less certainty and more opportunity. They find it better to enter the trade right away with a better risk/return. Others find it better to wait for confirmation and sacrifice a bit of profit for a better probability that the trade will work in their favor. That’s a higher win rate and a lower risk/return.
Your system and style may work better with one or the other. Timing will determine how good or bad your system is, so learn all you can about it. Backtest and find out which settings work best. This way, you’ll know the right time to enter your trades. Once you get your timing right, your trades will have incredibly lucrative results.
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Disclaimer: Any content from this newsletter should not be taken as financial or investment advice, but for informational and entertainment purposes only. This newsletter simply shares my personal opinions. Investing in stocks, bonds, futures, options, and other securities carries significant risks. Some or all capital may be lost. With leveraged instruments, losses may exceed initial capital. Past performance of a security does not guarantee future results. Consult with a registered financial/investment professional. This newsletter and its authors are not licensed financial/investment professionals. By reading and using this newsletter, as well as any other publications, you are agreeing to these terms.