| When to Enter a Forex Trade |
We’ve discussed how vital Consistent Position Sizing is in trading a strategy or system, and factors to account for as you design the entries in your system, and now we're going over trade timing. Timing trades is more difficult than it sounds. In fact, when I surveyed our readers, many of whom are already experienced traders, timing came in as the top issue trader’s struggle with. It isn’t necessarily a complex subject, but is one that can stymie some traders. I have found that most uncertainty around timing is actually anxiety about pulling the trigger or actually executing an order.
As such, we have found that proper preparation, and a clear set of rules is critical to overcoming this issue. Part of our preparation in this course so far has been around finding an entry rule and planning for slippage and trading costs. That planning is important for two reasons. First, we want to make sure our backtesting is as realistic as possible, and second, we need to plan for timing.
We divide timing strategies into three different methods:
- Entering at the beginning of the trading period following a signal - Using a price benchmark - Arbitrary entries for trades when timing isn’t a crucial issue Entering at the beginning of a trading period This is the method we will use in the system we are building as an example in this course. Specifically, the entry signal we use is generated by a COT trend, and a CCI breakout, and is complete on the close of the candle that generated the signal.
So in the example below, the entry occurs at the open of the next candle. Usually that will be virtually the same price. This makes for a very simple and unambiguous entry strategy.
The signal here appeared on 2/12, so you would have entered when the next candle opened on 2/13 at 1.4573. On my daily charts, that cross-over (close of the candle) is at 4:00pm so I conveniently know that is the time I need to be paying attention to my execution. Once the signal has appeared and the candle has closed, you can make the trade immediately. In the video, I will discuss some ideas about what to do if you feel too much time has passed since the signal has appeared to execute the original trade. You will find that it is once again all about planning.
Using benchmarks to trigger entries The use of a benchmark is more about the price of an entry than timing. The idea is to set a limit order after a signal has occurred at a specific price that may appear in the future. For example, in the chart below you can see that a clean break above resistance completed an anticipated signal for a Fibonacci support and resistance trading system. Because the timing of that breakout is uncertain – a limit order just above resistance makes sure that an entry is placed at 1.0160.
Using benchmark levels is something that is very common with discretionary trading systems. Discretionary trading systems are those without prior defined signals or specific rules. They require analysis and some level of subjectivity. For example, if you are using Fibonacci analysis to identify trading opportunities as the market moves, you are using a discretionary system. The advantage of using a benchmark is that you can plan in advance where your entry order will take place. So when the breakout occurs, you already know where your trade will open. Planning ahead removes the pressure of decision making in the heat of the moment, and makes execution much easier (Remember, even a subjective or dicretionary system should contain the elements we discuss in this course, such as backtesting, timing and consistency in size).
For example, imagine that you were anticipating a bounce off the 23.6% retracement level on the USD/CAD. The market was there but you were trying to determine whether it would it bounce or break through. Since you are only interested in taking the trade if it pops back up off resistance, you could have placed an entry order to time the trade when it actually made the move and created a signal.
If prices meet that level on a bounce, the long position will be entered automatically through the limit order, without your interference. You have effectively planned ahead to take advantage of the opportunity. The disadvantage of not planning ahead like this is that you are faced with having to make a decision with each tick of the charts.
“Do you trade now? How about now? What about now? Has the opportunity passed? It’s moved a few pips should I still take the trade? It retraced; what do I do now?” This kind of thinking, and the erratic trading behavior it spawns is how accounts get blown up.
Arbitrary trade entries This is one that takes many traders by surprise when I start talking about it. In specific situations, an arbitrary entry works just fine. Usually, this is for longer term trading strategies, or purely fundamental trades that are open-ended. For example, if you have been trading a carry trade portfolio for years, anticipating long term gains, it didn’t really matter when the initial trades took place because the trends are so large and long, and for the most part can run indefinitely. The individual components of a carry trade portfolio like this may only change every few months, and then only when interest rates shift, so timing is not a major factor to the long-term success of the strategy or system.
Timing entries is an issue that traders tend to overcomplicate unnecessarily. Overcoming hesitation or emotional trading with your entries is always a matter of prior planning, and clear trading rules. If you already know in advance where you are going to enter a trade, then there are no decisions to be made or emotion to overcome when the time comes. In the video, I will walk through two specific examples of timing an entry when executing a trading system. Keep up with us:
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3.25 Copyright (C) 2007 Alain Georgette / Copyright (C) 2006 Frantisek Hliva. All rights reserved." |
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