What trigger(s) do you use to get into a trade ?

This is a discussion on What trigger(s) do you use to get into a trade ? within the New to Trade2Win forums, part of the Reception category; SHORT ANSWER Are you a gambler or a trader? If your current answer to this question is along the lines ...

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Old May 22, 2008, 5:48am   #1
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What Triggers do you use to Enter a Trade?

SHORT ANSWER

Are you a gambler or a trader?
If your current answer to this question is along the lines of ‘it feels right’, ‘gut instinct’ or ‘a bloke I met in the pub recommended it’ – then you’re gambling rather than trading. In the short term, you might get lucky. In the long term, this approach is a recipe for disaster. Good traders only ever enter trades for sound and logical reasons. That’s not to say that a hunch or intuition can’t play an important part. It can, but it needs to be backed by knowledge, skill and experience. Reliable intuition is developed over time; few traders are blessed with it from the start.

Different kinds of triggers
A trigger to enter a trade is usually a specific event that is pre-defined and can vary enormously depending upon a variety of factors. Most traders use Technical Analysis (TA) or Fundamental Analysis (FA) as the basis for taking their trades. These are discussed in detail in another FAQ, simply entitled: What is Technical and Fundamental Analysis It doesn’t really matter whether you’re drawn to TA, FA, a mix of the two or something completely different. What matters is that you enter trades for a specific reason; one that provides you with a positive expectancy. In other words, the results of your back testing and forward testing indicate that a profit is more probable than a loss. (See the Essentials Of First Steps Sticky for a detailed explanation of ‘positive expectancy’.)

In the Long Answer, 5 important factors are discussed to keep in mind when creating entry triggers of your own and, in post #3 entitled ‘Useful Links’, you’ll be able to find threads with examples of specific entry triggers - be they TA based, FA based or something in between.

Last edited by timsk; Oct 14, 2010 at 12:18pm. Reason: Updating
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Old May 22, 2008, 5:48am   #2
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What Triggers do you use to Enter a Trade?

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TA based triggers
Most trade entry triggers are based on Technical Analysis (TA) or Fundamental Analysis (FA). Traders who employ strategies based on TA tend to use the breach of an important price level to trigger their trade entries. These include (but are not limited to) things like a breach of a high or low of a specific bar or candle, or a key level of support or resistance.

FA based triggers
Traders who employ strategies based on FA will enter trades based on things like earnings announcements or other key data that is likely to impact their market and the price of their chosen instrument(s). It might be something as simple as an article in a newspaper, as in the following example, quoted from Peter Navarro’s book ‘If it’s Raining in Brazil, Buy Starbucks’:

“Despite excellent management and a solid fundament outlook, Starbucks’s stock has dropped more than 8 dollars in the last several months. At this point, the savvy investor notices a small article on the back pages of the Wall Street Journal (WSJ) indicating that the rains have come to break a deadly drought in Brazil – the world’s largest coffee producing nation.

On this news, the savvy investor buys several thousand shares of Starbucks. She’s betting that the rains will save the Brazilian coffee crop, that this will cause coffee prices to fall dramatically, and that this, in turn, will drive up Starbucks’s profit margins as well as its share price.

Over the next week, Starbucks’s stock falls 2 more dollars, but the investor sits tight. Finally, the stock begins to rise – and quickly – ten dollars in just three days. She sells her shares and is out with an $8,000 profit.”


Mix ‘n match
As a generalisation, it’s true to say that - in the past - traders have tended to be either in the TA camp or the FA camp. Additionally, the shorter their preferred timeframe; the greater their use and dependency on TA. These days, increasingly, traders are utilising a mix of the two disciplines. In the quote above, the savvy investor spots an opportunity and uses the WSJ article as the trigger to enter her trade. However, initially, the stock continued to fall and, at one point, she was $2,000 ‘offside’. (I.e. if she had sold her shares, her paper loss would have become all too real and she would have been $2,000 out of pocket.) If she was familiar with some simple reversal patterns then, in theory, she could have waited until the stock changed direction and entered at a more optimal price, based on a TA trigger. In so doing, she would have enjoyed a bigger profit and would not have had to weather the $2,000 paper loss. The basic concept of her trade was sound but, arguably, the timing of its execution left a little to be desired.

Listing all the entry triggers that traders use in this FAQ would take forever and make for rather dull reading. Instead, this FAQ will focus on the kinds of things that members would do well to consider when creating entry triggers of their own, that are best suited to their trading style and time frame. For anyone wanting examples of specific entry triggers - please refer to the threads listed in post #3 entitled ‘Useful Links’.

Trade set ups
Before going any further, there is one very important issue to address first, and that is the trade set up. Just as one wouldn’t squeeze the trigger on a riffle without first positioning oneself carefully and then taking aim; to focus on the entry trigger without first considering the set up would be putting the cart before the horse. A set up can be defined as a confluence of TA patterns or FA events which must occur first in order to validate any subsequent entry trigger. If a valid set up does not precede the entry trigger, then the proposed trade should not be taken. Likewise, trades should not be entered on the basis of the set up alone; a valid entry trigger must also ensue. For the ‘savvy investor’ above, the WSJ article could (and, arguably, should) have been considered as a set up only – rather than an entry trigger.

Entry triggers: 5 key characteristics
Here are 5 key characteristics to keep in mind when devising your own entry triggers, many of which are equally applicable to trade set ups . . .

Keep it simple
This is really important – especially for day traders. Your set ups and entry triggers need to be simple, unambiguous and crystal clear so that you can spot them easily in real time and make an instant decision that’s in keeping with your trading plan. If you look over old trades and conclude that they’re invalid because the set up and/or entry don’t meet your criteria, then the cause is likely to be that they’re too complicated or not sufficiently black and white.

Timing
Like great comedy, central to a good entry trigger is great timing. At some point or another, virtually all traders have analysed the markets correctly and got its basic direction right, but completely fluffed the timing of their entry. Get into a trade too late and you run the risk of ‘chasing the market’. Typically, it becomes temporarily overbought and you buy just ahead of a pullback which stops you out. Price then resumes its original direction, shooting past your entry level. Conversely, get in too soon and you run the risk of ‘trying to catch a falling knife’. Price then either reverses after having stopped you out, or, what you imagined would develop into a full blown reversal pattern turns out to be a simple continuation pattern instead. These are easy mistakes to make and are often very difficult to avoid. That said, ideally, a good entry trigger will have a failsafe facility that will, hopefully, keep you out of trades that you don’t want to be in.

The Exit
There are a number of debates that rumble on and on about which traders never seem to agree. High on this list is the argument about trade entries and exits: which one is most important? We won’t discuss this here, save to say that there is an old adage to the effect: ‘entries define risk and exits define reward’. For many traders, risk trumps reward. However, that’s not to say that exits aren't of critical importance. Central to this is knowing where you’ll close out the trade it goes against you. If your exit is too close to your entry trigger, you run the risk of being stopped out by market ‘noise’ during volatile periods. Conversely, if it’s too far away, this might involve taking on too much risk. A good entry can’t be viewed in isolation; it needs to be viewed in the context of the exit as well.

Profit Targets
Is there a realistic and probable expectation of the trade going into profit? Lots of traders don’t believe in profit targets as this is akin to trying to predict the future. This is fair enough, although some common sense can still be applied. Suppose you’re an equities day trader and your chosen stock has an average daily range of $2.00 and it’s up $1.75 on the day. Furthermore, it’s Friday and the markets close in half an hour. Is it really wise to enter long at this point, knowing that the stock is unlikely to rise much more and that it’s common to see some profit taking at that time of the day? Under these circumstances, the probability of the trade working out isn’t too great. To use a driving analogy, think of entering a trade like overtaking a car on a straight road with oncoming traffic in the distance. The speed you’re travelling at, the distance between you and the oncoming traffic, along with their speed, all need to be weighed up in an instant. If in doubt, sit on your hands. Anything other than a high probability trade is, by default, a low probability one.

Context
To sum up all the above four points, context is king. This is so important, it’s worth shouting about: CONTEXT IS KING! The perfect set up can appear, followed by the perfect entry trigger, but is the context perfect too? Suppose the instrument is well up on the day and has already moved 90% of its average daily range. Additionally, there’s known resistance immediately overhead, indicators are in overbought territory, news is bearish, there’s a major announcement due out in five minutes from the chairman of the Federal Reserve and the longer term trend is down. Do you still want to enter long? Do you, do you really? Assessing the context of any proposed trade is a major advantage that discretionary traders have over mechanical traders. It also accounts for why so many TA patterns fail. Context is king and being able to evaluate it quickly and effectively is often central to a discretionary trader’s edge and the difference between their account showing a profit instead of a loss.

Last edited by timsk; Oct 14, 2010 at 12:26pm. Reason: Updating
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Old May 22, 2008, 5:48am   #3
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Useful links

T2W Bot started this thread USEFUL LINKS

If you find other threads, Articles or sites on your travels around the net that are relevant to this FAQ, please add a link to them in this thread, outlining what it is that you like about them. Thanks!

T2W THREADS
Entry=Risk Exit=Reward|:
Voted 'Favourite Journal' in the T2W Members' Choice Awards for 2009. It explores entering the market on a 5 min chart and running the position into a swing trade to achieve the maximum reward for minimum risk.
Advice on Technical Indicators for optimum Points of Entry
This thread discusses the relative importance of entries Vs exits.
Random entry systems
Closely linked to the debate about the relative importance of entries Vs exits is the debate about whether entries matter at all. Many members will argue that they don't and that it's other factors like trade management and psychology that govern the outcome of the trade. This thread explores some of these issues.

T2W ARTICLES
The Most Popular Entry Strategies in Forex by Sam Sieden
A good article which does what it says in the title - although there's no reason why the ideas discussed can't be applied to other markets.
If you can't spot it, don't trade it! by Gabe Valazquez
This article reviews one of the first skills that a new trader must learn before s/he can engage the markets - which is the identification of low risk entries.

T2W REVIEWS
If it’s Raining in Brazil, Buy Starbucks
This book was referenced in the Long Answer. It's described as being 'the breakthrough trader's guide on how to spot - and profit from - news-driven market swings', although it probably won't help much with designing trade entry triggers!

EXTERNAL LINKS
None here? If you find a good one, let us know and we’ll add it!

Last edited by timsk; Apr 11, 2012 at 5:45pm.
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Old May 22, 2008, 5:48am   #4
 
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What trigger(s) do you use to get into a trade ?

My system is divergence based, but, as we all know - you will need a 2nd confirming trigger once the divergence pattern shows a possible long or short.

What do other members think/use ?
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Old May 22, 2008, 6:50am   #5
 
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we've just entered the rainy season, so if it's pishing down I go Short, if it's sunny I go Long
Cloudy weather is consolidation, waiting for a breakout either way
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Old May 22, 2008, 10:27am   #6
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sounds like a good idea to me
one thing which can be overlooked by newbies like me is a clear trade strategy/plan and pulling the trigger is an issue in itself.developing firm rules or at least guide lines on WHEN and WHY to pull the trigger once your setup is identified is,imo, VITAL to long term profits.
i hope people will contribute.
personally i look for a number of signals to say the same thing and together point to confluence and the reliability of the trade.these signals can differ from setup to set up but mainly i look for confirming candlestick patterns with confluence,e.g.divergencies,stoch crosses etc. for me indicator signals are SECONDARY and serve as confluence only.
the chart attached shows what i would look for.all the bullish signals give me confidence in pulling the trigger on the break.
i hope this helps,happy hunting
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breakout.gif  
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Old May 22, 2008, 10:34am   #7
 
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instinct.
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Old May 22, 2008, 11:19am   #8
 
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I also use ~ Pivots, Candlestick Patterns, ParaSAR.

And finger, licked, then poked out of the study window....
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Success is the ability to go from one failure to another with no loss of enthusiasm. Sir Winnie Churchill
Success in trading is the ability to go from one losing trade to the next without changing your strategy..... Winnie the Pooh

Last edited by timsk; Oct 14, 2010 at 12:07pm. Reason: Housekeeping
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