One of the few variables that a discretionary trader can control for with respect to entries is the point at which one enters the market. Since direction to the trade as well as volatility to the trade are unpredictable and the length of time that one holds on to a trade is often outside of one’s control, deciding on the point at which one enters into the market is crucial. And where one enters into the market is a function of several variables including the size of one’s position, the amount of adverse price movement one can afford to lose before one’s trade idea is proven incorrect by the market, and the size of one’s stop loss.
Most experienced discretionary traders at some stage will have studied the ‘sniper’ strategy and its very tight set of entry conditions which the trader then uses to trade as frequently as possible at superior points in the market. In such cases, the number of trades taken at good locations will normally far exceed the number of similar trades taken at below average locations.
Define what an entry signal actually has to prove
A precise entry rule is a testable statement about market behavior. Instead of saying “the price looks strong” you could say “the price has closed above the prior swing high on above-average volume, following a higher low”. Each of the clauses can be tested for, and each of the clauses can fail.
Write your entry criteria as a short list of conditions which need to be satisfied before entering the trade. Then, test how often all the conditions are satisfied for a particular trading instrument and for a particular time frame. This will tell you how often the whole set of conditions occurs. If, for example, a set of conditions occurs only three times a year, then this set of conditions is useful as a filter but does not form a trading strategy by itself. However, if it occurs every day then at least one of the conditions is worthless.
Separating trigger, context, and confirmation
The biggest source of confusion with entry is that people mix up three different jobs when designing an entry system, defining the context (trend, range or transition), selecting the trigger for the trade and determining the confirmation for the trade trigger.
- Context is usually assessed on a higher timeframe and should be settled before the session starts.
- Triggers need to be mechanical enough to execute without debate, for example a break of a level, a retest, or a specific candle close.
- Confirmation should cost you something, typically a worse price in exchange for a lower probability of a false start.
Treat support and resistance as zones with a reason to exist
Arbitrarily drawn horizontal lines and crossover entries rarely deliver consistent results, for arbitrariness by definition equals unpredictability. In contrast, well defined levels have been established through prior activity (a prior consolidation area, high volume areas, the open of the trading session, etc.).
The width of the area is as important as the location. An entry based on a single price level will result in a binary trade. A zone is created based on the body and wicks of specific candles. Then you can scale out within the zone and have an area for validation of the trade as well as the rejection of the trade via a wick through the area.
Reading the reaction rather than the touch
How the price behaves right after touching the level is far more important than the actual touch itself. In particular, one needs to know how fast the price is leaving the zone, whether it holds on the subsequent test of the zone and whether the resulting move is consistent with the average volatility of the underlying instrument.
Let risk-to-reward decide whether the trade exists at all
Entry precision creates an arithmetic upside in that tight stopping to, for example, 25 points vs. 40 points while keeping the same target will increase the reward multiple in question. But you must remember that tighter stopping also increases the risk of ‘getting stopped out by noise’. So the logical stop is the price at which your trade idea has ceased to be true, not some ‘attractive’ price.
| Entry approach | Typical fill quality | False start exposure | Trades available |
| Anticipate at the level | Best price, tightest stop | High | Many |
| Wait for a confirming close | Moderate price, wider stop | Moderate | Moderate |
| Wait for a retest after the break | Good price, defined invalidation | Low | Few, and often missed |
All entry strategies have one critical element in common, none is superior to the others in theory. Impulse, filtering, or anywhere in between depends on what kind of edge your strategy has generated. Higher frequency of trades, bigger win rate or huge occasional outliers, pick your poison.
Build procedural defenses against impulsive entries
If an impulse trade rarely feels like an impulse trade, then it rarely feels like one should be taken in the first place and thus needs to be structurally implemented rather than motivated for. Traders who want a ready-made framework for this kind of discipline would do well to study the sniper trading strategy, which spells out its entry conditions in advance and leaves little room for improvisation.
- Write the entry, stop, target, and size before placing the order, and refuse any trade missing one of the four.
- Set a daily cap on the number of new positions, independent of profit or loss.
- Require a fixed delay, even sixty seconds, between deciding and executing on anything outside your written criteria.
- Log every trade against its stated criteria and review the exceptions separately from the rule-following trades.
Knowing when precision becomes avoidance
Of course, the reverse of this coin also exists, that of building too much of a filtration system around one’s entry. If one is adding clause upon clause of criteria for entry, it is wise to frequently test the system with the removal of the least predictive criteria to measure if any decrease in trading expectancy has occurred. At what point does precision become something one is paying for and ceasing to add value to one’s overall trading results?