This is a Guest Post by Al Hill the Co-Founder of Tradingsim.com.
You can follow TradingSim on twitter here.
It’s All About the Entry
This post is spot on for my trading activity today in the market.
I went long the stock DDS first thing in the morning on a breakout.
Since 70% of breakouts fail, the stock began to rollover and I ended up with a slight loss for the day.
But as I look at the chart, there were a ton of opportunities where I could have turned a profit.
To this point, I want to dive into arguably the most important aspect of day trading – getting a great entry.
Focus on Buying Pullbacks
The first thing I want to stress is waiting for a great entry. The rush you get from jumping in a position quickly dissipates if the position goes against you.
I like to wait for a strong up move with 2 or more candlesticks going my way and then wait for a nice pullback into a target support zone.
The key is waiting to see how price reacts to support. Again, it’s not a race to place a trade, let the game come to you.
Look for Volume to Spike
This may sound counterintuitive, but you want to enter the market when everyone else is running.
The tricky part here is you need to know the difference between an actual sell off and the transition from weak longs to more seasoned traders.
So how do you do this?
Simple enough, you look at the time and sales and level 2. This will help you determine the order size and flow that is contributing to the down move.
Identify a Support Area
A support area is what you need to identify to provide a validation signal for your entry.
I like to use point in figure charts, Fibonacci, trend lines and chart patterns. This sounds like a lot, but it all comes together on the chart to produce confluence points.
The key point is to stay on the same time frame when identifying these support areas. Some traders will try to use three or more time frames, but this can create confusion.
Know When You are Wrong
Just like today, you need to know when things are not going your way. For me it’s if my trade does not turn a profit in 30 minutes.
So, you will need to look through your trading log to see when you are most likely to lose on the trade.
Another measure beyond time is if price moves your way by a certain percentage. There is no absolute number that you can use for every instance, but again you will need to look at your trade log to determine the value that most applies to the stocks you trade.
Practice Your Entry
Instead of focusing on making these huge sums of money on each trade, you should focus on your entry.
You can use a market replay tool like Tradingsim to identify various setups and test how accurate your entries are on each trade.
Focusing on the entry aspect of the trade is not often discussed but is the separator between average and winning traders.
Think about trading like track and field.
You must come out of the blocks like a cannon in order to win.
In Summary
If you can nail the entry, you can almost mismanage every other aspect of the trade and still come out ok.
You could sell too early, hold on to your position too long or botch the money management aspect of the trade.
However, if you get the entry right, you are trading with the wind to your back and things have a way of working out.
Conversely, if you are top ticked, I don’t care how much analysis you have performed or how knowledgeable you are about technical analysis, your odds of coming out on top are slim to none.
Al Hill
Co-Founder, Tradingsim.com
You can also follow TradingSim on twitter here.