In the last article, I discussed what the perfect entry looks like theoretically. And just like most theoretical stuff, the perfect entry is also difficult to achieve.
However, once you have determined “the perfect entry” you can achieve something closer to that by following a bunch of these rules below.
Do your Homework:
If you are a swing/positional trader, a bulk of your potential entries (and the stop loss in each) should be worked out during the weekends. This will reduce noise and enhance your focus on the shortlisted watchlist. Focus is in short supply in life anyways, therefore making the best use of what’s available by doing the necessary homework is essential to success. Similarly, if you are a day trader, your watchlist should be prepared fresh every day.
Use GTT/limit orders:
Once you have your focussed watchlist, you can already have your buy orders punched at a designated price (the perfect entry price). This way you will get the price closest to your perfect entry. Do this to save yourself from the mental and emotional stress of tracking the live price, and the crippling FOMO of missing on the trade. It will also avoid you from buying the stock at an overextended price.
Never buy an extended stock:
If you have missed the perfect entry somehow (even after using a limit order; happens sometimes), do not buy if the price is extended by more than “X”% from your buy point. As I am a swing/positional trader, this is about 2.5-3% for me. Seldom do I buy if it has extended more than 5% from my ideal entry point. The higher your trading timeframe, the higher “X”% you can afford; as your gain % will also be higher.
But why?
It aggravates your Stoploss. A 5% stop loss will turn into an 8% stop loss if you buy it extended by 3%. It’s simple math. We are measuring the SL from the buy point above, as shown in Godfry Phillips's example below.
Similarly, it also reduces your expected maximum Gain. A 23.35% profit will be reduced to 19.65% (more than 3% lesser) if bought more than 3% above the previous buy point (see example in the image below).
To recap, these are the 3 practices that will help you get near to the perfect entry point:
Do your Homework.
Use GTT/limit orders:
Never buy an extended stock:
Okay. Now that we are on the same page that the perfect entry is an entry that gives you (among other things) the minimum risk to your entry setup. Here are some setups and tricks you can use which in my opinion provide the best risk and hence the best reward/risk ratio:
Buying at the beginning of a Stage 2 uptrend:
whatever the setup, buying at the beginning of a Stage 2 uptrend will maximize the odds of the trade working in addition to ensuring a higher gain.
A stock will base (move sideways) even in stage 2 anywhere from 3-6 times (if it is not a Tata Elxsi, which has more than 6 bases). A base breakout entry from the 1st/2nd base will have greater chances of success as compared to the 3rd/4th or higher.
Not buying Breakouts:
Yes, you heard it right. Breakouts are amazing in a raging bull market or when the stocks have just entered stage 2. In a sideways market (or a bear market) or at the fag end of a bull market, breakouts will fail left right, and center.
Buying the retest of a breakout:
Most if not all breakouts will come back to test the breakout zone for any supply left. Placing a GTT around this point post-breakout is a smart way of getting a low-risk entry. Another way would be to buy the stock on its way back up after the retest. An example of this retest entry is my entry on Apollo Microsystems I made last year (see image below)
Buying Pullbacks:
A retest is basically a pullback to the breakout level or the previous resistance level. there are other forms of pullbacks as well; e.g pullback to a key moving average. This can be the 10sMA/21eMA or the 50sMA (or any other MA which the price has been respecting).
An example of these is from Apollo Microsystems shown below.
Anticipation entries:
Now, this is me trying to provoke you (or maybe challenge you). Yes, we can successfully anticipate a move before it happens. I was a non-believer too until I met Pradeep Bonde from Stockbee (check him out on Twitter). Last week itself, I made 2 peak anticipation entries (chart below).
I sometimes tweet about my trades live on my Twitter as well. Click here to follow me @sakatashomma to learn more about technical analysis ( Not for Tips).
What is an anticipation entry?
It is basically entering without the confirmation of the move. Hence an anticipation can be of an impending Flag breakout, a Cup and Handle breakout, a flat base; or a pullback entry before the bounce off of the key MA.
I however believe it’s a higher-level skill and best to avoid if you are a beginner.
Anticipation entries provide an even better risk, in my case a risk of below 3% and therefore very high Reward to risk ratios.
To recap, these are the 5 tricks and setups that will help you achieve the least risk and hence inch you closer to the perfect entry point:
Buying at the beginning of a Stage 2 uptrend.
Not buying Breakouts.
Buying the retest of a breakout.
Buying Pullbacks.
Anticipation entries.
That is all for the weekend.
Next week I will write about some really cool stuff that separates the coolest traders among the cool dudes: Risk management and position sizing.
While I have you here, my long-form Technical analysis masterclass starts sometime soon (March-April 2023). It is going to be amazing. Please join if you want to upgrade your trading with my help. Register here.
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Cheers,
I will see you next weekend. Happy charting
To the point "Entry point" ... Thanks