Do you have trouble pulling the trigger? If so, you're not alone. Greed and fear exert a powerful influence when the time comes to enter the trade. This is especially true for newbies who have great difficulty visualizing the rewards or risks they're about to incur.
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.
Q - What strategy will overcome unfilled orders because there aren't good pullbacks on breakouts?
A - The problem is, as soon as you get more aggressive, that's the exact moment the stock will reverse. You can use continuation patterns like triangles on lower-time-frame charts to enter positions, but even these require assuming more risk. So the real answer most of the time is that you miss the trade and move on to the next one.
Q - Is an intraday move sufficient to enter a breakout, or should I wait for the closing price?
A - There is no right or wrong answer about intraday vs. closing breakouts. You need to work with trading signals that fit your lifestyle. These may be closing or intraday triggers; it depends on your risk tolerance and ability to watch the markets. Short-term
traders can't wait for too many end-of-day signals. Alternatively, long-term traders need to apply good intraday filters to avoid whipsaws and protect themselves from sudden losses.
Q - How do you keep from getting shaken out by whipsaws?
A - You're really asking the ultimate Zen trading question: How do I know I'm right? Zen answer: There is no right and no wrong. You manage risk. Do that well, and you're right.
Breakouts and breakdowns either go or they don't go. Most of the time you can't tell the difference. Some patterns are easier than others to interpret, and certain kinds of setups have a gut feel that tells you the coast is clear. Just control risk the rest of the time and take the trade to its logical conclusion.
Remember the input you have on the position's outcome. First, you can choose a small position instead of a large one. This keeps your risk small if you're wrong, but you can still make money if you're right. Second, you can take your best shot and keep a tight stop-loss. You take the loss and move on if you're wrong. You add to your position if you're right.
Q - Do you implement a turnaround strategy? For example, do you reverse your position after stopping out in one direction, or do you simply get out?
A - I operate under the premise that each setup, long or short, needs to stand on its own merits. Hitting a stop loss doesn't automatically make it a good trade in the opposite direction. In fact, getting the direction right is the easy part. The hard part is finding the reward-risk equation that's favorable for the new setup.
Q - How can I trade a breakout and not get stuck in the crowd?
A - Timing is everything with breakouts. You're trading with the crowd when you see a breakout and hit the entry key. You're ahead of the crowd if you're already positioned when the stock breaks out, and you're behind the crowd if you're waiting for a pullback to enter the trade. Both of these methods make more money over time than chasing the breakout.
Q - What should traders think about before committing to a position?
A - Trade setups have trigger prices called execution targets. The trigger points are reached within price levels called execution zones. Traders should stop what they're doing and pay close attention when price approaches one of these levels.
We track a variety of information on our trading screens, including quotes, charts and indicators. But our real job is to watch for ripples on a quiet lake. These are the numbers that are out of place or approaching levels where other traders will take action. The trick is to be aware of these levels and have an action plan before they take notice.
Most traders are programmed to react to breakouts and breakdowns. This is the Pavlov's dog syndrome, no more and no less. Traders see the market move, and they salivate. It's far better to train yourself to recognize price zones where a small wiggle will bring in the crowd. Then you're acting on the situation instead of reacting to it.
Q - Should I scale into and out of positions?
A - You can average up or down as part of position-building as long as you're using it as a strategy rather than an excuse for a bad trade. Keep your initial size down so you don't take too many shares at high-risk levels. You can also add to profitable positions, but keep in mind that the reward/risk equation changes as a position moves in your favor.
Scaling into profitable positions increases risk if you don't pick the right execution levels. The best plan is to wait for the position to clear an obvious barrier before adding to it. Then move in your stop to protect your growing profits.
I rarely scale out of positions, because I like to exit on wide-range bars and pass my shares to someone else. This is just a personal preference. Other folks probably do a better job scaling out and keeping a piece for a follow-up move.
Q - I'm trading 15-20 setups per day. Am I overtrading?
A - Only you can tell if you're overtrading. I don't know if your positions are 100-share scalps or 5,000-share bombs. There's a big difference between the two. Do as much as you can without getting confused about why you're in a particular trade.
Write a note to yourself each morning to sum up the day before it begins. It should say "The chips could break down," "Watch for a Dow selloff," "Keep an eye on banking stocks," or things like that. Use this document to decide on offense vs. defense going into the new trading day.
Q - How do you assess volume before making the trade?
A - I use volume only at certain points of pattern development. These tend to be near breakout or breakdown levels. Then I want to see if there are divergences between price and volume, or anything that will inhibit the expected move. I also examine volume on pullbacks and will pass on trades if I see something I don't like.
A good rule of thumb for volume is to ignore it unless it absolutely, positively captures your attention when you look at it.
Q - If I want to buy or sell 20,000 shares in a flat market, how do I keep from getting noticed?
A - With highly liquid stocks, just hit the button a few tiers away from the inside and get filled. With moderate-volume stocks, do the transaction over 30 minutes by picking an average entry or exit price. If possible, don't trade more than 1,000 to 2,000 shares at a time.
You need to be clever and patient when trading large lots on thin stocks. Pick very quiet periods and stretch the entry or exit out over a long time. And never show your real size to the public, specialists or market makers.
Q - Is it a problem to trade stocks that average below 50,000 shares per day?
A - If you're trading size that makes up 5% or 10% of the total daily volume, you become the market when you put in your order. So you must plan on massive slippage in your pre-entry calculations if you want to trade large size in thin markets. Also keep in mind there's no strategy to get you out of the market without massive slippage if you want out fast.
Q - What role do the futures play in entering trades?
A - There are three correlations between equities and the futures markets. There are stocks that trade with the futures, stocks that trade against the futures, and stocks that go their own way regardless of the futures. You have to determine the correlation for your stock before using the futures as an entry tool.
For example, tech stocks correlate well with
Nasdaq 100 futures, and blue chips correlate well with S&P 500 futures. Oil, gas and gold often trade against the short-term futures direction. Biotechs that trade on news releases can go their own way, regardless of the futures markets.
Trade execution always depends on limited information. Entry itself is secondary to effective management in determining whether you make a profit. Having said that, there is more correlation between equities and the futures markets now than at any time in the past.
Article reprinted with kind permission of the author.
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.
Q - What strategy will overcome unfilled orders because there aren't good pullbacks on breakouts?
A - The problem is, as soon as you get more aggressive, that's the exact moment the stock will reverse. You can use continuation patterns like triangles on lower-time-frame charts to enter positions, but even these require assuming more risk. So the real answer most of the time is that you miss the trade and move on to the next one.
Q - Is an intraday move sufficient to enter a breakout, or should I wait for the closing price?
A - There is no right or wrong answer about intraday vs. closing breakouts. You need to work with trading signals that fit your lifestyle. These may be closing or intraday triggers; it depends on your risk tolerance and ability to watch the markets. Short-term
traders can't wait for too many end-of-day signals. Alternatively, long-term traders need to apply good intraday filters to avoid whipsaws and protect themselves from sudden losses.
Q - How do you keep from getting shaken out by whipsaws?
A - You're really asking the ultimate Zen trading question: How do I know I'm right? Zen answer: There is no right and no wrong. You manage risk. Do that well, and you're right.
Breakouts and breakdowns either go or they don't go. Most of the time you can't tell the difference. Some patterns are easier than others to interpret, and certain kinds of setups have a gut feel that tells you the coast is clear. Just control risk the rest of the time and take the trade to its logical conclusion.
Remember the input you have on the position's outcome. First, you can choose a small position instead of a large one. This keeps your risk small if you're wrong, but you can still make money if you're right. Second, you can take your best shot and keep a tight stop-loss. You take the loss and move on if you're wrong. You add to your position if you're right.
Q - Do you implement a turnaround strategy? For example, do you reverse your position after stopping out in one direction, or do you simply get out?
A - I operate under the premise that each setup, long or short, needs to stand on its own merits. Hitting a stop loss doesn't automatically make it a good trade in the opposite direction. In fact, getting the direction right is the easy part. The hard part is finding the reward-risk equation that's favorable for the new setup.
Q - How can I trade a breakout and not get stuck in the crowd?
A - Timing is everything with breakouts. You're trading with the crowd when you see a breakout and hit the entry key. You're ahead of the crowd if you're already positioned when the stock breaks out, and you're behind the crowd if you're waiting for a pullback to enter the trade. Both of these methods make more money over time than chasing the breakout.
Q - What should traders think about before committing to a position?
A - Trade setups have trigger prices called execution targets. The trigger points are reached within price levels called execution zones. Traders should stop what they're doing and pay close attention when price approaches one of these levels.
We track a variety of information on our trading screens, including quotes, charts and indicators. But our real job is to watch for ripples on a quiet lake. These are the numbers that are out of place or approaching levels where other traders will take action. The trick is to be aware of these levels and have an action plan before they take notice.
Most traders are programmed to react to breakouts and breakdowns. This is the Pavlov's dog syndrome, no more and no less. Traders see the market move, and they salivate. It's far better to train yourself to recognize price zones where a small wiggle will bring in the crowd. Then you're acting on the situation instead of reacting to it.
Q - Should I scale into and out of positions?
A - You can average up or down as part of position-building as long as you're using it as a strategy rather than an excuse for a bad trade. Keep your initial size down so you don't take too many shares at high-risk levels. You can also add to profitable positions, but keep in mind that the reward/risk equation changes as a position moves in your favor.
Scaling into profitable positions increases risk if you don't pick the right execution levels. The best plan is to wait for the position to clear an obvious barrier before adding to it. Then move in your stop to protect your growing profits.
I rarely scale out of positions, because I like to exit on wide-range bars and pass my shares to someone else. This is just a personal preference. Other folks probably do a better job scaling out and keeping a piece for a follow-up move.
Q - I'm trading 15-20 setups per day. Am I overtrading?
A - Only you can tell if you're overtrading. I don't know if your positions are 100-share scalps or 5,000-share bombs. There's a big difference between the two. Do as much as you can without getting confused about why you're in a particular trade.
Write a note to yourself each morning to sum up the day before it begins. It should say "The chips could break down," "Watch for a Dow selloff," "Keep an eye on banking stocks," or things like that. Use this document to decide on offense vs. defense going into the new trading day.
Q - How do you assess volume before making the trade?
A - I use volume only at certain points of pattern development. These tend to be near breakout or breakdown levels. Then I want to see if there are divergences between price and volume, or anything that will inhibit the expected move. I also examine volume on pullbacks and will pass on trades if I see something I don't like.
A good rule of thumb for volume is to ignore it unless it absolutely, positively captures your attention when you look at it.
Q - If I want to buy or sell 20,000 shares in a flat market, how do I keep from getting noticed?
A - With highly liquid stocks, just hit the button a few tiers away from the inside and get filled. With moderate-volume stocks, do the transaction over 30 minutes by picking an average entry or exit price. If possible, don't trade more than 1,000 to 2,000 shares at a time.
You need to be clever and patient when trading large lots on thin stocks. Pick very quiet periods and stretch the entry or exit out over a long time. And never show your real size to the public, specialists or market makers.
Q - Is it a problem to trade stocks that average below 50,000 shares per day?
A - If you're trading size that makes up 5% or 10% of the total daily volume, you become the market when you put in your order. So you must plan on massive slippage in your pre-entry calculations if you want to trade large size in thin markets. Also keep in mind there's no strategy to get you out of the market without massive slippage if you want out fast.
Q - What role do the futures play in entering trades?
A - There are three correlations between equities and the futures markets. There are stocks that trade with the futures, stocks that trade against the futures, and stocks that go their own way regardless of the futures. You have to determine the correlation for your stock before using the futures as an entry tool.
For example, tech stocks correlate well with
Nasdaq 100 futures, and blue chips correlate well with S&P 500 futures. Oil, gas and gold often trade against the short-term futures direction. Biotechs that trade on news releases can go their own way, regardless of the futures markets.
Trade execution always depends on limited information. Entry itself is secondary to effective management in determining whether you make a profit. Having said that, there is more correlation between equities and the futures markets now than at any time in the past.
Article reprinted with kind permission of the author.
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