When creating your Written Trading Plan, one of the most important things you must include is your Trade Entry Method.
It is the most important aspect of your trading that will influence our results in trading.
There are a myriad of different Technical Trade Entry Methods or systems out there and knowing which one to use can be a daunting task.
The 5 main types of Trading Systems are:
1. Trending Trading Systems
2. Countertrend Trading Systems
3. Breakout Trading Systems
4. Trading Range Trading Systems
5. Hedge Trading Systems
It is important to realize when choosing or creating a Entry Method that trading is a probabilities game, as there is in my experience, no system out there that is correct 100% of the time. Many traders tend to prefer to trade with the trend as it tends to lead to higher probability that the momentum of trend will continue.
So the key to becoming a successful trader is to put the probabilities in your favor. So in this article I will discuss what I believe are the 3 key attributes to a Successful Trade Entry Method.
Trade Entry Method with a Low Risk Entry
Frankly the biggest mistake a lot of traders make is taking on to much risk in a trade for the perceived potential reward. You need to be able to define Low risk opportunities to increase your trading success. Many traders will simply apply a simple percentage stop loss to a trade position. Which sounds like you are limiting your trade risk in theory, but depending on where you enter the position in a trend, can dictate how often your stop losses are hit and are forced to take a loss. It is much better to use technical analysis and find some support or resistance to define to the cent where your stop loss is set. If the resistance or support is broken you know without doubt it is time to get out.
Taking on to much risk can really effect a traders decision making, trading psychology and ultimately lead to excessive account draw down, because of fear, worry & stress it causes.
By being able to determine the amount of risk and the potential reward you can calculate your Reward to Risk Ratio. It is good practice to look for opportunities which are at least 3 to 1 Reward to Risk Ratio.
One method I like to use is Price Headley's William %R method which helps me define low risk trade entries. If you a beginner to intermediate trader, I strongly recommend finding a mentor to teach you the ropes of finding great trade entry opportunites, it will shorten the time for you to learn the ropes and become successful.
Trade Entry Method that is a Rules Based Trading Method
Using a Rules Based Trading System has many benefits. It gives you a set of strict setup rules that must be achieved before you will even consider entering a position and avoids trading from gut feel. It gives you a base for consistent performance and improvement. So all you have to do is be disciplined & ensure you follow your rules. You can also easily setup rules-based stock scans to save time in finding your next opportunities.
Trade Entry Method that finds High Probability Opportunities.
Finding or creating a Trade Entry Method which finds High Probability Opportunities is easier said than done. The best way to find the probability of any Trading Method is to compare the number of winning trades compared to the number of losing trades, this will give you the a winning percentage. You will need to of course, include your exit method in this calculation, because with every entry there needs to be an exit in terms of it either being profitable or a loss.
For those that have some sort of Technical aptitude in terms of trading software, by correctly setting up trade scans you can back-test any Trading Method on past trading data to determine the probability and profitability before you put your hard earned money on the line.
With good money management rules even a trade entry method with 50% winning probability can be quite profitable, by keeping your losses small and letting your winners run.
I hope that you are enjoying this blog series on the “Top 10 questions a Trading Plan must answer“. Below are all the posts in this series:
- What are your Life Goals & Trading Goals?
- What is your Trade Entry Method?
- What are your Trade Exit Methods?
- What type of orders will you use to enter & exit?
- What are your Money Management Techniques ?
- How will you manage your Position Risk versus Reward?
- What is your Process for Open Trade Review & finding New Trades Picks?
- What is your Trading Success Profile?
- How will you Review your Trading System to measure & improve?
- What is your Trading Daily Routine-(Part1 & Part 2)?
Next Blog Post ” Trading Plan - Defining your Trade Exit Methods”
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