The Art of Entry
Tuesday, December 18, 2007 at 08:40AM In many ways, trading is an art. There is a beauty in identifying, planning and executing a trade. That being said, I am going to teach you how I became a Van Gogh of the stock market.
In my opinion, a good entry takes away a lot of the stress that trading will encounter. For example, how to manage a loss, where to set a stop, and how to start off the trade with gains for a much better experience. Do you know how much easier life is when your trade makes money right out the gate? For me, decisions are much easier to make when I have a profitable cushion provided by the market, or I have insured an easy to manage loss that I am comfortable with. These things are all possible with a good entry.
A few days ago, I taught you how I trade breakouts. The strategy I am going to discuss is different; this is how I trade trending stocks.
There are a few simple rules I like to follow, and these are the rules I have taught day in and day out since I started trading, and since I started this blog. In fact, I know many of you have already adopted these rules and use them successfully. Let's start with the first step.
1.) Find a great trend.
This is a very important prerequisite. The strength of the trend will dictate how successful the outcome. Don't settle for a trade that won't make you any money. I see many traders fail to find stocks that will make strong moves, or that will move, period. I have mentioned "momentum" stocks recently and selecting a stock that is going to move is a huge part of my process. You've all seen the stocks I trade, so I won't go into any further detail.
Rule of thumb: As a minimum requirement, I look for stocks that move at least 10% from low to high.
2.) Buy the Dip / Sell the Rally
To many, this approach seems very uncomfortable... Buying a stock that is going down, or shorting a stock that is going up. However, this can be a very effective entry signal in a strong trend.
Think of each stocks movement as a "breath." A stock will breathe in, and then breathe out. Here is a diagram to help illustrate.
Points 1, 3, and 5 are where the stock inhales before moving higher. After a big move, the stock must exhale ( 2, 4 and 6) before moving higher again.
Buy the exhale.
Doing this is an anticipatory strategy and like everything else, it isn't 100% profitable. However, if used properly, can be 100% effective. While this strategy can help you get into a trade at the earliest point possible, it can also help you to manage losses. Personally, I like my losses quick, small and easy. Out of every approach I've traded, I have been able to produce quick, small and easy losses with this method. Here is how...
Take a look at former Option Addict favorite, SYNA
I have highlighted all the trade entries I have discussed over the last 6 months via my watchlists. You'll notice that these are the same points I illustrated on the trend diagram. These are the dips you are attempting to buy. When used with a simple trend line acting as support, you are trying to pick and anticipate the point in which the stock will stop going down and start to rise again.
Note, this strategy will not work forever. At some point the trend will cease to exist. Using this strategy will help you identify exactly when that will occur. In fact, SYNA recently gave up on its trend. Take a closer look:
I have highlighted the point that identifies the trend failure. It is the first close below support. Had you bought the dip during the first week of December, you'll notice that the closing price of the day I highlighted was still above the closing price on the day the trade was taken. It is possible that you might have walked away with a profit here as opposed to a loss (which won't always be the case).
3.) Enter at Your Exit
When you decide to enter the trade, enter as close to your exit point as possible. If a close below support is where you would exit a trade; buy at support. The further away a trade is from your exit, the more risk you will assume in the trade.
This example shows how taking a trade far away from support can leave you with excessive risk. I highlighted an entry at $56 with support close to $51. First off, this means you have missed a $5 point move already (10%). I hate to see a late entry like this, and never trade like this. Never. Aside from the missed opportunity, you have to let the stock go back to support. As long as the stock remains above support, the uptrend is in tact. You'll commonly hear me say this, but if you ever exit a trade like this with the stock above support...this is what I call "committing trading suicide."
If support is much lower than the price that you've entered, this will help you determine risk. If I bought at $56, and support is at $51...I am risking $5. If I am risking $5, it better be to make $10 - $15. If not... what the hell is the matter with you?
4.) Be Disciplined; Follow the Plan
Let the trade play out, and follow the plan. If you didn't have a plan prior to taking the trade...you deserve the outcome.
This approach is very simple, yet effective. As you can see, the approach I take is a pure observation of price action and does not require the use of another price observing tool. There is going to be plenty of discretion as to which stocks you trade, which entries you refuse, etc. This is where the use of volume analysis can help to confirm your analysis, or the study of daily price ranges can help find shifts of power between buyers and sellers during "inhales and exhales."
References (4)
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Reader Comments (35)
Wonderful basic stuff Jeff broken down for us all to remember. Thanks for reminding us with one of the core pieces for what we do here! Reminds me of 'Trading Room' days.
Thanks!
Ah...
Those were the days, weren't they?
Thanks JK
Thanks for the advice Jeff. It's a shame I wasn't quick enough to recognize the reversal in SYNA like some of the others on here. I recall quite a few folks on here calling SYNA a double top. Just need to keep chugging away I suppose. At least this year's tuition to learn the market hasn't been too expensive hah. Where's the Santa Claus rally everyone's talking about?
Yeah .. My renewal was end of November ... Guess who didn't renew???
Studying e-minis today - paperTrading - looks like I may can do this ... :))) Thanks for that entry in early November ....
Jeff,
Thanks for another great post!
Kim,
Kudos to you for your SYNA trade! Nice....
Jeff - looking at a 2-year AMP chart, a close below $54 today seems meaningful. Do you agree?
I think I get it.
Just focus on the "breath" ohmmmmmm
Very enlightening. Thanks
John,
AMP/54 looks good...however the time frame is enormous. It could take this stock up to a year to hit its price target.
Be prepared :)
Nice monster. By the way I am up in all my trades today. Crazy world ain't it.
Jeff,
Truly a great post.
Another for the "Greatest Hits".
Thanks for all you do!!
Jeff,
Great post. In my trading self analysis recently I was struggling with my rules from Draper (a close above the high of the low day, blah blah blah) vs. getting in at my exit point. Consistently drawing R5216 trendlines on my charts really helped me to understand where the exit is in a trending stock, hence giving me my entry point. I've abandoned the IT method because I have more confidence in the exit/entry method. The results are showing.
ISRG - I've been waiting (patiently) for it to come down to my 1 year trend line at $300, plus it should be a psychological level. Am I on track?
Jeff, Great Post - thanks!!!
Consider for a future post selecting the strike price for puts and calls (If has been covered already please direct me to post).
Tom in SC
Jeff,
I just wanted to say thanks for all that you do for us. I have understood these theories and plans for over 2 years now, but have only consistently lost more money than I have made. However; since I have been following you on your website, I have finally learned to be discipline and execute my trades with real precision. I have also learned to take the emotion out of trading. Something I never thought possible. I have finally begun to make some real money and cut my losses short. Thanks Jeff, We really appreciate your service.
Brandon
Chicago, IL
SYNA - Blown right through my original target of $45.50 based on the double top pattern on fantastic volume today. The next level of support I see is $39.50. Am I on track?
Jeff,
...btw, thanks for reading my mind.
When you say a 10% move, is that intra-day, day to day or low to high of a prior move?
How about the first day. If you bought close to support at the open but by the end of the day it is going to close below your open - but still above support, you'd stay in? If it were to close that first day below support you'd get out?
Not wanting to get too painfully picky, but that's why we're here... if the on second day it opens below support, would you stay in until you saw where it closes? If above support you stay, if below you split?
I can't tell you how many light bulbs have gone on in my head since I started reading your blog. It's scary -- especially when I open my mouth.
Thank you sooooo much. Now all I have to do is make $$$$$$$$$$$$$
Jeff,
Thank you for these two last posts on the entry's for breakouts and trends. Your reviews always add new insight. Did you get the email I sent you earlier for the possible put candidates. I did not post them here because I wanted to make sure I didn't mislead anyone.
VA Bch
What is an R5216 trendline???
Benton,
I thought it was odd, and of course they can take care of themselves, this choppy market may may made me loose my keen eye for good Sarcasm. Thanks for clarification!
Cheers,
Arty
Tom in SC,
Have a look at the Greatest Hits section on the left menu bar of the main web page. There is a lot of info there, and you're likely to find answers to your questions. Consider printing it all out as a primary resource. Enjoy!
SueD,
R5216 is a Raimo coined phrase of drawing trendlines on the 5 year, 2 year, 1 year, and 6 month chart for anything you're analyzing. The trendlines should have multiple "events" touching the trendline over several periods.
Have you read the Murphy book? It's speaks of many of the things Jeff subscribes to in trading and I know Jeff recommends it highly. You can buy it from the bookstore link on the blog. Worth every penny.
VA Beach Girl,
Are your R5216 trend lines diagonal or horizontal? If you could take a minute when you get a chance and e-mail me one of your charts for reference I would appreciate it. Thanks.
Ann
favrewatkins@bellsouth.net
Ann,
It depends, honestly. You want to look for significant "events" in the life of the stock in that time period. I do have some that show a horizontal resistance level becoming support over the time period I'm analyzing and I will draw my trendline accordingly. Kim
Isn't it up to the stock? Can you pick and choose how you draw lines?
It's all about connecting the dots, and connecting the most dots possible...
Clean cups Y'all.
Jeff,
Thanks for the article. Very valuable for me. I need to hear this over and over.
regards,
Steve
Jeff,
It all makes sense, thanks. 2 questions:
1. I know you wait until the end of the day to determine if the price action is supporting your decision to enter or exit, but on the exits, how do you handle it when the stock moves WELL below your entry/exit position intraday (which would be below support) & just keeps going (i.e. doesn't rebound for a "small loss")? Do you still wait until the end of the day, or would you have pushed that sell button mid day taking a much smaller loss than you would have had at the close?
2. OXY - I exited this call trade yesterday when it closed below the apex of the triangle just to watch it rebound 2.50%+ today. Would you still consider this a good exit based on the rules you taught us?
Brandon,
Fellow Chicagoan.....trying to get my emotions in check is my BIGGEST problem...how were you able to do it?
Excellent, Jeff. Thanks for continuing to teach us.
Thanks Jeff for yet another great post after talking about trading Breakouts.
"look for stocks that move at least 10% from low to high" The high-low is in the context of 3 month, 6 month or 1 year chart?
In trading breakouts, we enter at end of trading day. What about trading trending stocks?
Jeff...As usual, this was another great post...I'd be most appreciative if you have any advice or (perhaps) would be willing to do a post on setting stops appropriately...it seems I'm getting stopped out before the big runups and am missing some great runs. I usually use StockPrice*.1 to set the price below support in an uptrend (i.e. StockPrice*(1-.1)). Hope this is clear...I love this site and am learning tons from you...it's like having a mentor I can trust.
Thanks for all you do...
Thank you Jeff. Great post. playing catch-up.
Hi Jeff,
Just read this post, and it's really great information. Thanks for sharing all the wonderful info. about trading on this blog site. Had a question. In step 1 when you are identifying a trend, do look for the trend on a weekly chart, or a daily chart, as there could always be a short-term daily trendline withing the larger weekly trendline. I guess the entries would be much more powerful and profitable if the price is dipping down to the weekly trendline. How do you generally enter? Weekly or daily trendline?
Thanks a bunch, again
Manju
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