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Market Entry Strategy
The Smart Profits Report: Issue #421
Wednesday, May 16, 2007
Market Entry Strategy: Three Ways To Grab A Better Entry Price Than “At The Market”
By D. R. Barton, Jr.
Quantitative Analyst, Mt. Vernon Research
As investors, we’re always looking for an edge in the markets. And today we’re going to discuss finding an edge in our market entry strategy through entry prices.
You see, while many ordinary investors simply buy “at the market” (i.e. the current price), there are some better ways that you can execute entry points. Let’s look at a few market entry strategies you can use to get more effective entries and gain an edge over the crowd.
Is Your Market Entry Technique Consistent With Your Trading Strategy’s Market Concept?
For example, if you have a system that identifies trading channels, you need some sort of market entry strategy that will allow you to sell near the channel tops and buy near the channel bottom.
Some trend following systems count on getting a good entry on the long side by buying on a pullback. Since these are longer-term systems looking to capture longer-term trends, this can be an excellent strategy.
On the other hand, if your entry strategy is based on a breakout or breakdown system, then you’re best served by following the price after confirmation of the move. That’s because simply waiting for a pullback will most likely lead to either of two unwanted results:
- The price will never pull back and you miss the entry on a good trade.
- Or the price pulls back and just keeps moving against the breakout for a loss (a routine occurrence in breakout trading).
Do You Have To Get In Right Away?
This is a great question if you follow long-term newsletter recommendations or if you base your trades on fundamental data.
Jumping in at the exact minute you hear or read about the recommendation is probably not the best market entry technique. If a popular newsletter with a big subscriber base makes a recommendation, lots of folks are going to be jumping in. And unless the stock is very liquid, it will be a bit like someone yelling, “Fire!” in crowded theater: Everyone wants to pile through the same door at the same time.
- If you’re a long-term investor, instead of fighting a newsletter “cattle call,” try waiting for the price to pull back a bit after the initial run-up. A 50% retracement of the move caused by the recommendation is a good rule-of-thumb to use.
- If you’re a shorter-term investor, or following a technical system, in most cases you should take entries as they occur.
Master The Art Of “Stalking”
Just like a cat stalks its prey, looking for the best possible moment to pounce, a trader can stalk a trade to get the best possible market entry price. This is a concept that respected trading coach Van Tharp talks about in his famous “Ten Tasks Of Trading,” and you can tailor it to your own strategy. For example…
- For Long-Term Investors: If you’re entering a long-term trade, based on fundamental analysis, it’s beneficial to add some technical analysis here to help you with the timing of your entry. And remember that in almost all cases when you’re executing a long-term trade, waiting for the price to enter an uptrend is a good idea.
- For Short-Term Investors: To help you stalk a trade, you can use the Level II screen here. This tool helps to give you a rough idea of the very short-term supply-demand balance for a given stock. When used with an understanding of its strengths and weaknesses, the Level II screen can be a very useful stalking tool to help give traders an edge in getting the best entry price for their trade.
Strong Market Entry Strategies Can Pay Big Dividends
Designing your market entry strategies to give you as strong an edge as possible is a task that takes extra time, but can pay big dividends in the long run - especially when combined with effective money management, asset allocation and proper use of stop-losses.
So take a look back at some of your previous entry points and see if there’s anything you could have done differently to get a better price. If you apply today’s techniques to your next trades, there’s a good chance you’ll grab a better market entry price and make your investments more successful.
Great trading,
D. R. Barton, Jr.
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Today’s Smart Profits Cribsheet
- Having the patience and discipline to execute a trade effectively is one of the most crucial skills you need to develop if you want to be a successful investor. Determining your entry point, then waiting for the stock to hit that price requires thorough research, self-control, and confidence in your system. If you’re tempted to enter a trade early, remind yourself why you picked that level. Jumping in impatiently and letting your emotions guide you will put you on the fast-track to losses.
- However, it’s important that you never try to time the market. It’s virtually impossible to do this successfully on a consistent basis. Instead, set two price levels. The first is the pullback price. The second is the breakout level - an area that you believe the stock will hit. The pullback price will give you the best entry price, but if the pullback doesn’t occur, you’ll be ready to enter at the breakout level instead.
- Following a predetermined set of rules allows you to stay disciplined, rather than act on emotions. To see how you can take advantage of a rock-solid trading strategy that will give you the best entry and exit prices every time, click here for more information.
Related Articles:
- Trade Your Way To Financial Freedom By Van K. Tharp
- Limit Orders: Dodging The Market Maker’s Bullet & Side Stepping The Liquidity Trap
- Time Value: With Options You Need to Be Right on Time
- Get The Entry Price You Want: The 3-Step System To Magnify Your Profits
The Chart Of The Week
While the Dow’s great run is well reported in the financial press, the small-cap Russell 2000 index hasn’t been able to follow suit and significantly break out from its February 2007 highs. Considering that the Russell has been the leading index over the past several years, its failure to continue to lead is a signal worth watching.
