One of trading’s most sought-after goals is divining an effective entry strategy. This also happens to be one of the most contentious areas of debate among traders. This is because the range of entry methodology is vast and, without exception, there are die-hard followers of different approaches. Most systems seek to catch breakouts because they lead to large moves in short periods of time.
While most professionals will tell you that risk management, cutting losses and letting profits run are the most important elements of systematic trading, it is self evident that effective entries are a key factor in increased overall performance, especially when they capture breakouts as they occur.
Many techniques use a one-size-fits-all approach to the market. But markets are dynamic, constantly in a state of flux, and tailoring your entries to capture the current dynamic is key. The reason for this flexible approach is that markets comprise buyers and sellers. Depending on who has control at the time of a potential entry, prices will move up, down or stay range-bound. Often, when one side takes control the other capitulates, which leads to explosive moves that can be exploited, if you know what to look for.
Follow your plan
As Mike Tyson once said on boxing, "Everybody’s got a plan until they get hit." Traders face the same scenario. The problem you face when pulling the trigger is that price action at any given moment may not necessarily present a step-by-step, cookie-cutter approach to a particular entry approach. You can have a great method and plan of entry, but when the unexpected happens, even the best of plans prove worthless.
If you don’t have a strong set of rules for pulling the trigger at that all-important moment of taking a position, then you run the risk either of getting left behind and watching a trade slip away or taking a gut-wrenching loss.
Worse, poor entries create a crisis of confidence that can be just as devastating as a loss of capital. While both can have negative effects on your mindset, capital can be replaced if your confidence remains high. But all the investment capital in the world does you little good if you are too gun-shy from past losses to keep trading.
In his book, "The Hedge Fund Edge," author and hedge fund manager Mark Boucher conducted a detailed study of the characteristics of runaway moves in stocks and the price patterns that have proven statistical edges that can give you a huge advantage in timing your entries and catching massive moves in the market.
These price patterns were labeled Thrust Breakout, Breakaway Lap and Breakaway Gap.