Pulling the Trigger Q&A
Effective trade entry requires skill, confidence and a strong stomach. Most of the time it should be an uncomfortable experience; no one likes to lose money. But the ability to follow a disciplined entry plan, even when it hurts, separates profitable traders from the hordes of losers who take up the game.
I receive dozens of questions each year from frustrated traders who aren't sure when to be in or out of positions. I've compiled the best ones here today, along with advice about helpful ways to enter the market with confidence.
Q - I get confused about the elements needed to make a trade. How can I tell when to pull the trigger?
A - What you really need is experience so you can correlate your decision to pull the trigger with the final outcome of the trade. Keep in mind that trade entry isn't an all-or-nothing affair. You can size your positions on the basis of levels of confidence and experience. Small lots do a great job in this regard.
Concentrate on aggressive trade management after entry, and you won't get hurt too badly. After all, it's just an odds game. Nothing more and nothing less.
Q - I have a good vision of the trade and where it's likely to go, but then I second-guess myself and miss the entry. How do I overcome this?
A - This is a common dilemma, and nothing I can say will really help. Either you'll find the discipline to act or you won't. Part of the problem comes from not trusting yourself, while the rest is a lack of confidence. Most new traders can't find the discipline to act when they need to act, and that's one reason the failure rate is so high.
If you haven't done so already, take the psychology route and read Mark Douglas' excellent book The Disciplined Trader.
Q - I'm a new trader. I watched a stock go to my entry price and take off, but I didn't buy it. So I entered it at higher price but it reversed and I lost money. What should I do next time?
A - Unfortunately, you're not going to believe me when I say chasing stocks will probably be your downfall. Sooner or later you'll kick yourself for missing a trade that would have worked if you'd just chased it. So you'll do it anyway and get caught in a reversing market once again.
Q - I've decided to enter positions only (1) in congestion before a breakout or breakdown, or (2) on a pullback. My stops are very tight. Is this too timid or am I finally learning how to trade?
A - The market environment dictates the trade entry process. New traders develop great discipline by doing exactly what you're doing. But there will also be times to get aggressive because the market is offering low-hanging fruit.
Successful trading is all about executing strategies that take advantage of current conditions. The trick is to pay attention to what the market is telling you on a given day, and then act accordingly.
Q - Many books recommend not buying or selling during the first hour. What's your opinion on this topic?
A - It's more fun to play the piano with all 10 fingers. I like to trade the first hour, but only if the opportunity is right. I agree on avoiding the open most of time, but there are two strategic problems. First, amateurs should avoid the open, but experienced traders can overcome the increased risk through specific entry techniques.
Second, there is a big difference between the opening and the entire first hour. The longer period often produces a buy or sell signal that marks a profitable opportunity to enter the market.
Q - Should I avoid buying a stock that hits my entry price when the market is about to close and the stock is near its lows?
A - It's a bad idea to buy stocks near their lows during the last hour. The primary trend often kicks in with full force during this time, and you don't want to fight it. Closing at or near the lows is also a prelude to gap downs or breakdowns from support levels the next morning.
Q - What's a better entry: buying the breakout or waiting for a pullback?
A - Neither is better. The pullback has lower risk, but you may not get filled. Entering the breakout has high risk, but you can make money when it works. One common mental error is to get upset because you miss a move. If you get caught up in this, you'll have trouble developing good timing in general.
The best method for new traders is to wait for pullbacks unless the broad market is very dynamic. If you don't get filled, it's no big deal and you don't lose money.