Picking the exact method and timing to enter your spread bet can mean all the difference between profit and loss. It is vitally important to have a well thought out plan for how you enter the market. Let’s examine two different trade entry techniques in some detail.
Trade Entry #1
Buying retracements on a strong upwards trend is a profitable trading strategy provided you can recognise the trend and know when to enter and when to exit. Let’s say that we have identified a bullish trend in Microsoft stock. We want to go long on this stock when price retraces back from a new high for a few days and then starts to rise again. We want our entry to be on confirmation that price has started rising again. We could just enter at any point on the retracement, but price could keep retracing for a long time and expose us to unwanted risk.
We wait patiently on the sidelines until Microsoft has pulled back from its new six month high. It pulls back slowly but significantly for 4 or 5 successive days. The pullback features daily bars that have progressively lower lows and lower highs.
On day 6 of this retracement, price makes a high that is higher than the previous day. We are now ready to place our buy order.
We will use a market buy at the next open to enter us into this long position. Our trigger for the trade was the higher high on day 6 of the retracement, and now we want to get into our long position as soon as possible after that. We enter the market at the open of day 7 of the retracement.
Alternatively, we could have used a good for the day buy stop order just above the previous day’s high throughout the retracement. This would have triggered us into the trade on day 6 instead of day 7. Neither strategy is right or wrong – you need to see what works best for your market, time frame and instruments.
Trade Entry #2
Buying momentum breakouts through a level of resistance can also be a profitable strategy when executed correctly. In this set up, price will have risen up to a certain level and failed to break through in the past.
Let’s say that Bunzl shares have risen up to 680p on two occasions in the last 3 months and failed. The stock is now rising up towards 680p again with momentum on high volume. We want to enter this bet if price breaks through the 680p level.
We place a buy stop for Bunzl at 685 and wait. If Bunzl breaks through the resistance, we will be triggered into our trade. If Bunzl fails at the 680 level again our order will not be triggered and there will be no trade. For this trade we will use a good till cancelled order.
Conclusion
As you can see, it is important that your trade entry technique complements how you are trading the market. Once you have found your set up, your entry should be at the best price possible that validates that your set up has actually occurred. Paper trade with a number of entry techniques to find the best set up for you.