Choosing the Right Stock Trading Entry Point
Choosing the right entry point is critical to any trading strategy. If you are using a stop loss (as indeed you should) then choosing an entry point which doesn’t go south after and trigger that stop loss is what every trader covets.
So how do we choose which is the right time to enter a trade?
There are a number of indicators we can use to help us. For a start we should look at both the long term trend of the stock and then at the short term volatility. Getting both these elements right will mean the difference between seeing green from the get go, or holding on to yet another loser hoping it may turn around soon.
The Long Term Trend
It may seem obvious but the first thing we need to do is to ensure the stock is headed in the right direction in the longer term. If the stock you are trading with is trending downwards then even if you successfully buy in when it is enjoying a bounce, the bounce won’t last long.
When you are looking for a stock to trade, choose a stock which is trending upwards. If you have been trading with a stock which is trending downwards then change to another stock. The stock should ideally have been trending upwards for the last six to twelve months.
This will give us a good starting point and give us the best chance of catching the stock at the right time when we are ready to take a position.
Once we are confident we have our target stock we need to pick our entry point when the stock is heading upwards in the immediate term. The up and down movement of the price of a stock on an hourly or daily basis is known as the short term volatility.
Short Term Volatility
The ideal entry price point is one which is never again tested by the stock. In other words as soon as you buy in the stock price continues to rise afterwards and never again comes back down to your buy in price. At least not until after you have exited and profited.
Now you’re never going to be able to get this 100% right all of the time, nobody can, but what we can do is maximize the chances of getting it right whenever we trade.
The secret to doing this is to use levels of resistance.
In brief, ‘levels of resistance’ are points when the stock price changes from going upwards to going downwards. This change in price direction creates a ‘peak’ which you can see in any stock chart. These peaks can last anything from a few minutes to several weeks.
However if the stock price has been trending upwards in the longer term, then the most likely scenario is that the stock price will eventually recover from its brief downward movement and head back up again, creating a new ‘peak’ at some point in the near future.
Logically we want to buy into the stock when it is in this ‘recovery’ phase, when it breaks through the most recent resistance level and heads up to make new highs.
We do this by buying-in AFTER it has broken the recent level of resistance.
We do this by placing a buy order just ABOVE the most recent price peak, and wait for the stock to come back up and break through that peak (resistance), thereby taking us with it.
This way if it fails to break through the resistance, then our buy order will not get filled. We simply wait until the stock has another attempt at breaking the resistance at some time in the future.
We know this will happen eventually as the target stock is in an upward trend. If by chance it doesn’t, then we never would have bought in in the first place. The worst that has happened is a wasted opportunity cost.
The trick with this strategy is that you don’t so much as buy into a stock, you allow the stock to ‘buy you in’. Provided you set your buy orders correctly, the stock will only buy you in when it is making gains and not while it is breaking down and falling through levels of support.
This strategy is covered in more detail in the ‘Ten Steps To Profitable Trading‘ ebook. It’s worth a look at if you’re thinking about trying this out.