Don’t Take Just Any Ol’ Entry
by D. R. Barton, Jr.
“A single advantage is worth a thousand sorceries.”
As traders and investors, we’re always looking for an edge in the markets. Today we’re going to discuss finding edges in our entries.
But before we talk about entry edges, let me be clear that I believe that entries are much less important than money management, stops and exits when it comes to system design.
With that said, there are still some useful ways to approach the design and execution of entries that can give you some additional advantages in the way you initiate your trades. Let’s look at a few questions and concepts you can use to make more effective entries.
- Is your entry technique consistent with your strategy’s market concept? When I speak of your system’s “market concept,” I’m talking about the beliefs upon which your strategy is built. For example, if you have a system that identifies a channel and then buys the bottoms and sells the tops, you need some sort of counter-trend entry that will allow you to sell near the channel tops and buy near the channel bottom.
Some trend following systems count on getting a good entry on the long side by buying a pullback. Since these are longer-term systems looking to capture longer-term trends, this can be an excellent strategy.
On the other hand, if your strategy is a breakout/breakdown system, then you are best served quickly following the price move after confirmation. Waiting for a pullback will most likely lead to either of two unwanted results: the price will never pull back and you miss the entry on a good trade, or the price pulls back and just keeps moving against the breakout for a loss (a routine occurrence in breakout trading).
- Do you have to get in now? This is a great question for folks who follow long-term newsletter recommendations and those who take trades based on fundamental data. For those trading on a shorter time frame or following a technical system, in most cases, you should take entries as they occur.
But back to those following long-term newsletter recommendations: Jumping blindly in at the exact minute you hear or read about the recommendation is probably not the best entry technique. If a popular newsletter with a big subscriber base makes a recommendation, LOTS of folks are going to be jumping in. And unless the stock is very liquid, it will be a bit like someone yelling, “Fire!” in a crowded theater – everyone wants to get through the same door at the same time.
Instead of fighting a newsletter “cattle call”, you might try waiting for the price to pull back a bit after the initial run-up. A 50 percent retracement of the move caused by the recommendation is a good rule-of-thumb to use.
- Have you mastered the art of “stalking”? One of Van’s famous Ten Tasks of Trading is stalking your trade. Just like a cat stalks its prey looking for the best possible moment to pounce, so a trader can stalk an entry to get the best price for entry. For a trader or investor entering a long-term trade based on fundamental analysis, stalking may include adding some technical analysis to help with the timing of the entry. In almost all cases for long-term trading, waiting for the price to enter an up-trend is a good idea.
Shorter-term traders may use the Level II screen to help them stalk a trade. The Level II tool helps to give traders a rough idea of the very short-term supply/demand balance for a given stock. When used with an understanding of its strengths and weaknesses, the Level II screen can be a very useful stalking tool to help give traders an edge in getting the best entry price for their trade.
Designing your entries to give you as strong an edge as possible is a task that takes extra time, but can pay big dividends. It may be useful to look back on your trade entries and see if there are other tools or techniques that can make those entries more effective.
About the Author: A passion for the systematic approach to the markets and a lifelong love of teaching and learning have propelled D.R. Barton, Jr. to the top of the investment and trading arena. He is a regularly featured guest on both Report on Business TV, and WTOP News Radio in Washington, D.C., and has been a guest on Bloomberg Radio. His articles have appeared on SmartMoney.com and Financial Advisor magazine. D.R. is a regular contributor to Tharp’s Thoughts trading newsletter.