Entry signal

This is a discussion on Entry signal within the Technical Analysis forums, part of the Methods category; I'm a swing trader and was wondering what other people use as an entry signal to enter a trade after ...

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Old Aug 24, 2016, 6:49am   #1
 
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Entry signal

I'm a swing trader and was wondering what other people use as an entry signal to enter a trade after a setup has been found?
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Old Aug 24, 2016, 8:22am   #2
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Hi Sidner - that's remarkable, I've just been mulling this over with some notes in my personal journal. After thousands of trades all I can say is I believe there's no single right answer.

I'm a trend-follower using daily charts so not a million miles form your approach I hope.

Let's get this going. I would say there are basically four classes of entry: using an uptrend/upswing as an example -

1. buy in the pull-back - i.e. on a low and falling price. This might be triggered by a %age price fall or breaching a MA or closing below a MA etc. etc. But the key is to enter low, don't wait for confirmation.

2. enter after the pull-back has finished - i.e. buy on a low but rising price. This might be triggered by a %age rise or a MA situation again or breach of high of a swing low bar etc. The key is to wait for confirmation of buying interest to demonstrate the uptrend is still dominant.

3. buy on an off-chart technical signal - i.e. MACD cross or stochastic oscillator cross or whatever you prefer - irrespective of price, the indicator hopefully merely confirms buying pressure.

4. buy at new high - i.e. new all-time or recent high, or highest close in n days or breach of a prior swing high or breach of overhead resistance etc.

The actual signals, like hammers and outside key reversals and technical alarms I think don't really matter - its the trend that's doing the money-making work, not the entry signal. But where you enter on the trend is important, that's why I am coming to favour entry class 1. My risk isn't that the trend will fail, that's common to all entries, its that I will enter at a higher price than I could have got - I can live with that.
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Old Aug 24, 2016, 8:49am   #3
 
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Sidner started this thread Hi tomorton.

Thanks for your reply.

Because you're a trend follower the entries will be a bit different I think. Like you said, you will be looking to enter on pullbacks.

As a swing trader I'm looking primarily to trade reversals. As an example, say I'm looking to short SPX soon, I'll be looking for some kind of signal to tell me when to short.

There are a few options in my opinion:

1. Enter on a down candlestick with a tight stop (market likes to take these out, so might take a few attempts)
2. Enter on a down candlestick with a wide stop (higher risk)
3. Enter on a moving average crossover
4. Enter on a pattern completion (e.g. a rising wedge) or a trendline break.

I've noticed I'm almost always too early for the reversal when it comes so I'm trying to slow it down and wait for more strength or weakness before entering. So I'm thinking a moving average crossover is probably the way to go.

In terms of trend following I've also considered entry criteria. In these cases I've been very discerning with what I choose to trade so that the entries are clear. For example a trendline break of a minor degree in a long term up trend. I also like RSI crossovers (above and below the 50 line).
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Old Aug 24, 2016, 9:52am   #4
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Sidner, you're right, we will have differing intentions but there are parallels.

Yes, MA crossovers will work, they are a notoriously lagging signal but if you want to wait for confirmation by (both) the cross and price, then this will be good for your approach. Likewise patterns - see http://thepatternsite.com/index.html for fine analysis of patterns from Thomas Bulkowski.

On your 1. and 2. entry options - a wide stop isn't automatically higher risk, it depends how much your stake per point is. So a stop at -2.5% of the entry price might cost you £100. but if your TA said you should place the stop out at -10% of the entry price, you should just reduce your stake per point so that £100 is still your capital at risk. Of course its much more likely that price would hit -2.5% than -10%, so the wider stop is actually lower risk.
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Old Aug 24, 2016, 11:12am   #5
 
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Sidner started this thread Yes very true. Maybe the wider stop is the way to go.

Thanks for the link.
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Old Aug 24, 2016, 11:41am   #6
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Whatever your capital at risk is per trade, the stop should be derived from TA. So, going long, I look for the low of the previous swing low in the uptrend. If that low is breached, then it implies the uptrend is over, so the stop goes a few points below there. Whatever that means in £ per point.

Error over stakes is more often made by daytraders - they do think that 6-pip risk is much lower risk (and somehow better trading) than a 30-pip risk.
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Old Aug 24, 2016, 11:57am   #7
 
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Sidner started this thread Yes that's very true. The only reason I equate higher risk with a wider stop is that I trade the smallest contract available at all times meaning I can't actually reduce my risk by trading smaller
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Old Aug 24, 2016, 12:15pm   #8
 
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Risk has less to do with whether stops are wide or tight than it does with knowing how to determine whether the trend is slowing, breaking, over, or reversing. Tom describes one yellow flag.

If you don't know how to determine the health of the trend, focusing on stops isn't going to fix the problem. One of the easiest and quickest ways to go broke is to use wide stops exclusive of all other considerations.
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