Trade entry decisions: Doing it right
Knowing when to enter the market is probably the most confusing thing for investors, especially new ones. In the absence of a good strategy, most investors rely on luck for favourable outcomes. When the trade entry strategy is rock solid, you can get away with just a small loss even if the market turns.
Understanding the right market entry timing can be perplexing, particularly for new investors. Without a well-defined entry strategy, success might rely on chance. With a robust trade entry strategy, even in a market shift, losses can be minimised. This blog will delve into ensuring foolproof trade entry decisions.
The importance of effective trade entry
Investors around the world still haven’t come to agree on whether a trade entry strategy is the most important thing while planning investments. But the argument in favour of it is very strong. A trade entry strategy is much more than what the name itself suggests. An entry strategy isn’t just about knowing when to enter the market and at what price. A trade entry strategy helps with:
- Predicting, calculating, and mitigating risks
- Knowing when to exit the market
- Having a risk-reward estimate
- Position sizing
According to experts, the main reason why new investors lose money is not because they invest in the wrong stocks at the wrong time. It is because their exit strategy isn’t sound, and they don’t know when to pull out. Another factor that causes beginners to make unwise decisions is the fear of missing out (FOMO). Even if the indicators aren’t promising enough, seeing an initial upward movement and other investors’ enthusiasm may force a hand. More often than not, these don’t end well.
Improving trade entry
Here are a few factors to consider when entering the market:
Timing: The single most important part of an effective trade entry strategy is timing. Most investors rely on various sources for their information and end up wasting time validating their findings. Instead, it is better to have a few reliable sources for information gathering. The aim is to be proactive instead of reactive. And since we are on the topic of timing, an exit strategy is equally important. It helps in reducing/minimising losses. Some experts have suggested that trade entry is ideal if it is during the first and last hours of trading. This is because, during these times, the volume of movement is high, resulting in volatility and price fluctuations.
Limit orders: Limiting orders is an effective way of improving trade entry. This makes it possible to purchase stocks at the best value possible. However, this requires the brokerage firm to be efficient with order execution. A slight slip and things may be less than ideal.
Track indicators: It is imperative to monitor market indicators and trends because they give a whiff of what investors are doing. It isn’t necessary to accept everything as the holy grail, but more the information, the better.
The stop loss: Despite your research and the indicators ticking all the boxes, the market may not go your way. In such a scenario, making a profit is out of the question and you should instead focus on keeping your money safe. This is where the stop loss comes in. Setting the stop loss just a little below a swing low will keep your small losses from becoming big losses. Also, if the relative strength index moves lower, it would mean that the market is still in an oversold condition. Investors would dump more shares and prices would fall further. Ideally, a stop loss should have been executed before the onset of such conditions.
Price target: Having a price target is a quantifiable way of approaching the trade instead of having an arbitrary benchmark for profit expectation. Trend channels indicate when markets tend to reverse, and prices fall. The best way to extract profits through a price target is to set a trailing stop loss. It goes along with the price as it ascends and based on indicators, you can project when it might reverse. This ensures that the stock can generate profit systematically instead of waiting to act when the market will reverse.
The most ideal way to make better trade entry decisions is to follow a few predetermined steps and indicators that should be in the affirmative for a trade to be undertaken.
- Use fundamentals to narrow in on a trade set-up
- Identify a trade trigger
- Decide on a stop loss to minimise losses in case the market reverses
- Decide on a profit zone and put the trailing stop loss to work
- Decide based on the risk vs reward analysis
An investor not averse to risks may still go ahead and execute a trade even if one of the steps isn’t in line with the strategy. That is when the possibility of a loss increases. Adopting a market entry strategy that has well-defined steps will ensure that your trade entry game will get better by the day.