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Get The Entry Price You Want

The Smart Profits Report: Issue #369
Wednesday, November 8, 2006

Get The Entry Price You Want: The 3-Step System To Magnify Your Profits
By D.R. Barton, Jr.
Quantitative Analyst, Mt. Vernon Research

Everyone gets excited whenever their system, newsletter, or investment advisor gives a new entry signal. It’s just human nature. The moment is pregnant with possibility and the anticipation of profits. But this excitement causes many people to jump into a trade at the wrong time when trying to get the entry price they want.

Many trading systems or investment services (especially ones with a longer-term focus) give signals for an “at the market” entry. Trouble is… if the stock is having a good move in your direction, you can end up chasing the price and paying much more than you should for the stock or option.

If an investor does this enough times over the course of the year, it can seriously eat into profits.

That’s why one of my favorite trading tactics is to “make the market (or the stock) come to me” instead of chasing after it. So let’s see why this works and how to do it…

Avoid “At The Market” Profit Erosion: Shop For a Better Price

Here’s an observation that always amazes me: People will spend more time shopping for the best price for a new digital camera than they will for a new stock trade.

Just last week, a friend of mine told me about the elaborate plan he followed in order to find the best price for a new camera. It involved browsing his favorite online stores, using Internet shopping “bots” (sites that search hundreds of online retailers for the best price), and then taking the results of these searches as ammunition to use while haggling with local retailers. I was exhausted just listening to him!

And all this was to save 30 bucks on a $300 camera!

Yet I know people who will buy 1,000 shares (or more) of a stock “at the market” just because they got a new buy signal from their investment advisor, or trading system. But if the stock runs just a little bit before your order is executed, you could end up paying much more than the price of that digital camera, just for the convenience of having your order filled now.

Don’t do it. There’s a better way to get into trades…

The 3-Step System To Getting The Price You Want

Here’s the three step process that subscribers to my E.S.P. trading service use to get the preferred entry prices on their trades, and jack up their reward-to-risk ratio at the same time. And far from chasing an asset’s price, it’s all about making the stock “come to you.”

  • Separate The Entry Signal From The Desired Entry Price

I know very few traders who take the time to do this - but almost all the ones that I know are professional traders. So why not be like them? The first thing we do is make sure that our system has a clear entry signal. Once that signal is triggered, we then add one more critical step - determining the best entry price we can reasonably expect to achieve (this is determined by using a combination of technical and quantitative analysis. But you can also use a simplified version by looking at chart support and resistance levels and intraday ranges).

  • Test The Entry Price Range Versus Our Reward-To-Risk Requirements

Once we determine the entry price we want to achieve, we determine a range around that price where we would accept a filled position. Then we make sure the price range gives us a preferred reward-to-risk ratio. We look at a minimum ratio of 2:1, but also scan for opportunities with much larger ratios. If it passes that test, the buy signal alert is issued.

  • Exercise Patience While Waiting For The Price To Trade Into Our Range

Now for the tough part. In the middle of the excitement of a new buy signal, we have to wait for the price to trade into our preferred range. It’s this entry discipline alone that gives us a huge edge over most traders. To give you an example that illustrates this… I recently issued an E.S.P. trade recommendation on a well-known retailer. We waited less than a day to get an entry that was about 3% better on the stock price and almost 40% better on the near-term option price! That’s huge - and a great way to make patience pay off.

Great trading,

D.R. Barton, Jr.

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Today’s Smart Profits Cribsheet

  • Want another great tip for always keeping the market makers on their toes, and getting filled at the entry price you want? Mt. Vernon Research Investment Director Karim Rahemtulla gives it to you straight in Smart Profits #285, Limit Order Discipline & Two Other Simple Rules For Making Money In Options.

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The Chart of the Week:

A major resistance level forming on PMC Sierra

PMC-Sierra (Nasdaq: PMCS) has endured a rough time this year. As it struggles to regain its footing, a major resistance level has formed at the $7 area - one that has held since August. Look for a sell sign here for at least one more pullback. A close above $7, however, could send the stock back to test $9 pretty quickly, though that is the less likely scenario.

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