By Richard K.
Introduction to Trade Entry Techniques
Trading involves so much more than just entering and exiting a trade but instead requires a process of careful planning, execution, and management. All of these elements of trading should follow a trading strategy that has been proven to provide the trader/user with an edge.
This article will cover a small but important part of this process involving trade entry techniques that you could apply immediately to your own trading. When working on your own trade entry strategy it would be wise to find a way that keeps your risk very small while allowing for much larger profit potential.
We will be looking at a recent trade example that set up perfectly according to my own trade entry strategy so that you can see how it is possible to take trades with small risk and large profits.
Trade Entry Techniques as a Confirmation Tool
Whenever it becomes time to think about opening a position, the last step I require before pulling the trigger involves entry confirmation. I need to see a few conditions present in the areas I want to trade from as they were developed to give me the best chance at being profitable while keeping me out of trades that have a low probability of working out.
My entry conditions are:
- Is price at an area that fits in with my analysis?
- Do I have momentum divergence as the price entered that area?
- Do I have reversal candlestick patterns present in that area?
- If conditions 1 -3 are all there, then do I have sufficient capital to take a trade associated with the risk on this particular setup?
Following this process, I get to qualify my entries following a set of conditions that are rules-based and included in my overall strategy. Next, we will apply these conditions to a recent real trade example that worked out according to plan, from the start to the finish knowing exactly what it is I need to do at every step of the way.
Entry Condition 1: Analysis
Using a very accurate blend of analysis, I was able to identify a trade setup ahead of time with a high probability of working out, but rather than just entering with a limit order I needed to follow my trade entry conditions first.
We will not delve into how I do my analysis, as this step will require plenty of explaining and is beyond the scope of this article, but what I can mention is that I like trading with the intermediate trend as identified from my larger time frame chart and that I join these trends at the end of corrections. So to do just that I follow and identify corrective patterns and pinpoint the areas where they are most likely to end.
The first chart is of AUD/USD and on it, I marked and labeled one such corrective pattern that is called a Symmetrical Triangle correction. I included a vertical black timeline on the chart as this was the date I started getting excited about this trade and knew where the correction was most likely to end ahead of time.
Using a smaller time frame I deciphered the internal price action of this correction even further and with a high degree of accuracy placed a blue box on the chart where I expected the price to enter and reverse from. One can see from the chart above that price entered into that price zone a day later, giving me plenty of time to prepare for an entry.
Entry Condition 2: Momentum Divergence
When I trade I only use one indicator as I am more concerned with analyzing pure price action. This indicator forms part of my entry conditions and is a great way to spot when momentum is drying up as price is going into an area I want to trade from.
Using only the histogram of a MACD indicator it became clear as daylight that momentum started becoming less and less as price continued to move downwards. This is called momentum divergence and I rely heavily on this condition as part of my entries.
Entry Condition 3: Reversal Candlestick Patterns
Most trade entry strategies will inevitably rely on candlestick formations to provide traders with clues as to what price might do next.
A careful study of major and minor turning points on any chart and on any time frame will reveal a wide range of candlestick patterns before price reversed at those areas. I only follow 3 patterns and any combination thereof and they will be my second last confirmation that I need to actually place my orders.
Using the same chart as I did before to confirm momentum divergence two of my favorite reversal candlestick patterns popped up inside of the zone I wanted to trade from. I managed to take the first one (red oval on the left) as I simply call that pattern a bullish reversal candlestick.
I’m sure there are many other more complicated names for this candlestick but that does not matter to me. What does matter is what this candlestick is actually telling me? I already know that momentum was drying up and the fact that price left a long wick at the bottom of that candle BUT instead closed much higher of its lows with a large green body, signaled to buy strength coming into the market at that low.
That was enough to quickly consider the last condition, involving risk before I finally placed my order. The second red oval provided a secondary entry in case anyone missed the first one and I like to call that pattern a bullish flanked Doji pattern.
Entry Condition 4: Risk Consideration
The last condition begs the question: can I afford to take on this trade? If yes and my account size allows for it then I immediately place my entry and stop-loss orders without hesitation.
The risk on this trade was well within my risk parameters as I knew that I should place my orders a set distance above and below the reversal candlestick. This was a trade on a Forex pair and most brokers will allow traders to adjust their own position size on any given trade, therefore most traders could have theoretically taken this trade with very little risk.
When trading Futures, for example, then traders are left with trading contracts that has a set profit/loss per tick and this is why the last entry condition is so important because if that reversal candlestick was on a commodity like Crude Oil then the risk could have been much larger.
I always trade with what I feel comfortable risking and then accept that risk before taking any positions. This is a crucial part of my trade entry strategy.
Target and Results
With all my planning, patience, and entry conditions I managed to nail the exact low of that correction with very little risk. I place my target order a few ticks below the price level from where the correction started from and from this trade it is clear to see that the profit well exceeded the risk and that my target was reached on the very same day.
I like taking these sorts of trades and in some cases, the targets are even larger, I was just lucky that the price moved strongly and rapidly in my favor.
Trade entry techniques will vary from trader to trader but they should all be aimed at achieving two important goals: confirmation and reducing risk. Professional traders are masters at managing risk and letting their profits well exceed their losses.
This article only offered you a glimpse of how I get to enter my trades but the process of finding these trades, identifying corrections, entering and managing them, involves much more work that can be very rewarding to any trader that wants to make a difference in their own trading.
If you ever wondered what it takes to become a more consistently profitable trader and to view my trade entry techniques in detail, then be sure to check my course offering here.
I wish you a successful and profitable trading journey ahead!
All the best