Hello, Forex Traders!
Often I mention the importance of establishing whether there is a trend in play, or not. Logically when there is a trend in place, the trader has the opportunity to trade with the trend setups or countertrend reversal setups. If the market is range bound, then the trader would be best advised to deploy range trading tactics. Take a look at how to determine the best forex entry methods and the tools for entries.
Obviously, it is vital to Forex traders to be able to recognize which environment the market is currently operating in so that they can employ the best-suited tactics and strategies at any particular time. Some traders tend to specialize in one type of trading; others can successfully trade all different styles. In any case, when building your trading strategies it is wise to be aware of these factors:
a.) what type of market structure do you want to trade?
b.) will you focus on 1 type of trading or all types of trading?
i) When a trader is focused, they would need to compensate that with scanning and viewing more currency pairs.
ii) When a trader is more all round in their approach, the trader can focus one fewer currency varying from 1 to a couple.
Read here more about how to build a trading strategy part 1 and part 2.
Establishing the trend is an important factor for the above process. Using the classical definition of higher highs and higher lows versus lower lows and lower highs is the right step. But putting it all in practice on multiple time frames leaves a lot of space for interpretation. Having clear guidelines and rules is therefore very useful and important. Basically, a crystal clear trend definition is worth gold, or in the case of the Forex trader: it is worth a lot of pips. Do you have that in your trading plan? Do you feel comfortable with your definition but there could be space for improvement? If yes, let me know down below and I will write an article next week Friday on defining the trend and how I approach the topic.
Read more about the following topics here:
1) trading impulsive and corrective price action
2) how to trade impulsive moves
3) how to trade corrective chart patterns
4) how to trade break outs of those corrective patterns
Regardless of the type of trading strategies and market environment you seek to trade, the methods of establishing an entry point in the market can be classified or grouped together into 3 different categories. Here are the groups and classification of entries:
1.) The 1st group: choosing levels/level picking, which is an early entry.
2.) The 2nd group: confirmation signals, which is waiting for proof of price respecting a level
3.) The 3rd group: momentum entries, which is waiting for a breakout of a certain area/level
Irrespective of what the actual entry signal is, I do think that each and every one of them fits in one of the three groups mentioned above.
Here are some examples for all of the situations above:
1) I would qualify an entry based upon the Fibonacci retracement tool as level picking because a trader is expecting the price to turn at that exact spot. The trader has the anticipation of a turn without any current evidence for that. The trader might, of course, have historical evidence that the entry methodology has proven to be successful but every new entry still remains to be seen.
2) A confirmation signal entry would be one when a trader uses the Fibonacci retracement but this time around only takes an entry when they see a candle stick formation taking place which confirms the fact that price is respecting that Fib level.
3) A momentum entry is when a Forex trader is waiting for a break of a (key) level. These entries are always waiting for the price to go through a tool drawn on the charts, such as a trend line. These traders are also called breakout traders. Here you can learn How to find opportunity in Forex.
TOOLS FOR ENTRIES
Here is a list of tools used by those traders:
1.) Level pickers:
- Top and bottom
- High and low
- Fibonacci retracement
- Fibonacci target
- Trendline bounce
- Bottom and top of range
- Chart pattern bounce
2.) Confirmation traders:
- Candlestick pattern formations in areas where they expect support and resistance based off of various tools and indicators
- Indicator confirmations
- A break of fractal in anticipated direction of move
3.) Momentum breakout traders:
- Trend line break
- Chart pattern break
- Fractal indicator break
- Break of the top or bottom
- Break of the high or low
TREND VERSUS ENTRIES
Irrespective of the fact whether you are trader the trades trends, counter-trends or ranges, all of us are still confronted with the choice of how to exactly enter the market. The paradigm Winners Edge Trading uses for their trading room is the following process:
1) Define the trend / market structure
2) Search for the opportunity
3) Check for filters (blocking the trade)
4) Qualify the exact entry
Therefore once traders have completed the first three steps, all of us traders then need to decide how they want to enter the market. In some cases an opportunity for one group would be an entry for another. A momentum trader might consider a pullback as an opportunity but take the actual entry up the break of a trend line, whereas the level picker might see use the pullback for an actual entry.
PROS AND CONS
There are some advantages and disadvantages when using the various entry signals. Most of them are quite straight forward and I am sure that they are many more elements, aspects, pros and cons than the ones I mention here below, so please mention those down below in the comment section!
An early entry:
a) Suitable for long-term position traders that are aiming for larger swings in the market
b) Less problematic to identify exact entry but in cases with tops and bottoms more difficult to use optimal stop loss position, in cases with Fibs stop loss is clear
c) Suitable for traders who want to monitor price action development less intense
d) There is a higher risk for that trade (due to no evidence of turn) and trade probabilities tend to be lower, which needs to be offset by higher reward to risk
e) The trade takes longer to develop compared to the other 2 groups
A confirmation entry:
a.) Traders can await the reaction of the market to the desired level, which for some traders might make it easier to take a trade
b.) The confirmation has the danger of turning out to be a small respect for that level but price, however, continues in the same direction (the confirmation turned out to be a small pullback for continuation of the momentum opposite of the direction wanted)
c.) The entry and stop losses are easily defined
d.) The reward to risk can sometimes be very high: a tight stop loss above a rejection wick targeting a with the trend continuation move could see high R: R’s
A momentum entry:
a.) Suitable for traders which want to optimize their entry point and clear stop loss level
b.) Suitable for traders who are very active in the market
c.) These entries have a higher chance of skipping sideways price action and catching the faster impulsive part of the move, which means that the trade usually is shorter
d.) Danger of trading false break outs and getting whip saws
e.) Exact entries and stop loss levels depend on where the break occurs
Some traders choose 2 or all of the above entry styles, which does give the opportunity for a trader to scale in and scale out. Scaling in and out is a great technique to maximize the profits when a trader is winning and minimize the losses when the trader is losing. The practical implementation of the technique, however, is not as easy as it might sound. A good tip for making this part of the trading easier is by treating every single entry as a separate analysis but with one risk management plan. Here is an example: regardless of the fact that your early entry is ahead a certain amount of pips, you want to make sure that the confirmation or momentum entry qualifies as a legitimate entry (even if you did not have the early entry which was making pips) and that there is sufficient space within your risk management parameters.Also read about Scaling in and Scaling out in Forex.
TRADING STYLE AND PSYCHOLOGY
The entry preference will vary for every trader, depending on their trading style and trading psychology. Some traders might not be able to handle early entries that well as they rather wait for a momentum break. Others might find it easier to trade a pullback as they are able to plan the trade more ahead of time. Your trading style and trading psychology are important factors which influence this choice, so those are elements that everyone will need to take into account for their own trading.
Despite the individual traits, there are some common elements which all entries share. Here is the table:
|Early||good||perfect||good but difficult (reversal)|
|ok but difficult (retracement)|
|Confirmation||perfect||ok (big range)||ok (reversal)|
|bad (small range)||bad (retracement)|
|Momentum||perfect||ok (big range)||Horrible|
|bad (small range)|
When a trend is in place, most entry possibilities are deemed desirable. The difference between good and perfect is a personal choice and up for debate. However, the advantage of waiting for confirmation and momentum in a trend is that there is more clear guidance when a corrective pullback is over and has finished.
In a range environment, the best entry to use is the early one. Waiting for momentum or confirmation can be ok if the range is wide enough and has sufficient space for a trade to develop with decent reward to risk ratio. If the range is too small, the latter two entries are not desirable.
With counter trend trading, it is important to note that generally speaking this type of trading is considered to be more difficult. If you do want to trade counter trend, then trading it with an early entry signal does provide the best prospects for both a reversal and a retracement. But once again, catching a reversal is difficult. A confirmation entry is ok if a trader is expecting a reversal, but if the market is only making a retracement then the confirmation entry might happen right at the turning spot for more trend continuation. Momentum entries are definitely not advisable for counter trend trades.
THE ENTRY MOUNTAIN
To give a visual example of the different types of entries, look at the screenshot down below.
I am using an example of a mountain to give an idea how the entries relate to each other.
Top of the mountain: At the top of the mountain a trader is very lonely, as he is the only one thinking that price could go down, whereas the majority of the traders are in the valley thinking how far can price go up. Nobody knows yet where the peak of the mountain (price) will be but the early entry trader makes a decision and goes for a certain level. If all goes well, his entry is right at the peak.
A third away from top: The confirmation entry is about at a third away from the top. These traders have been price hit the top and move down away from it and are trying to ride the trade back down to the valley.
Close to Valley: Momentum traders are waiting for the price to move down lower and pick up speed when the price is rolling down the slopes. It jumps on board when the price has a good speed and angle and is trying to catch the last but fast roll down into the valley, after which prices bottom out and due to its velocity rolls out and up the next hill (retracement).
In any case, whatever entry method you decide to use, it is always important to plan the trade ahead and wait for those market circumstances to emerge. Stop chasing the market is the motto. More information on that can be found in this article.
This wraps the article on entries. Make sure to look at the article on stop losses and take profits as well.
We recommend you follow up with our articles about the factor of time as well, you can find both parts here: part 1 and part 2.
Thank you for reading!
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