If equity trading had an equivalent to real estate's "location, location, location" maxim, I think it would have to be "entry, entry, entry". I remember reading a post years ago made by an internet poster talking about idealized entries, and the concept made an immediate impact and stuck. It's really a very simple concept: you theorize about what you consider would be an ideal entry, and you patiently wait for that entry. The concept is obviously the exact opposite of chasing as can be intuitively deduced, and, as such, represents yet another enormous helping hand in removing emotion from the decision making process and achieving a good, rationally justified entry. It also helps to greatly increase the odds of a successful trade since the poorer the entry, the more likely a losing shakeout prior to an important move. Whether it be minimizing losses when wrong (or even eking out a small gain), or maximizing profits when right, a good entry makes all the difference in the world!
An idealized entry is not necessarily a probable entry though, and that is a key concept to keep in mind. They're not the same thing. In fact, the most ideal of entries will most likely never occur. What we're dealing with is an idealized entry theoretical construct within a real world probabilistic context, and that context itself is dynamic. Data and events are fluid and ever changing and what may look like an ideal entry today may look quite different sometime in the future. As for a long term example, as I've said a couple of times in this "Let's Talk" series, 11,000, basis the Dow Jones Industrials, looks like a key level backed up by important price consolidation zones' high/lows with high levels of participation over the years, rising 200 month moving average support soon to coincide, 50% retracement level support of the entire move from March 2009, mid-range lower half long term Raff Regression level support, and this just slightly below 50 and 100 month moving average and very long term rising channel support coming in between 11,700 and 12,000. Imagine an IT sell-off with price stabilizing in the 11,700 area, new longs being established in the 11,700 to 12,000 area, and then a spike lower down to 11,000 taking out long stops on those new positions. Would that be an ideal long entry? Since nothing is perfect, and nothing is absolutely ideal, it wouldn't be in absolute terms, but it would rank very high on the continuum towards ideal. Since it would be a long entry with the long term trend it would be ranked even higher, and if it were to come with bullish divergences on the IT indicators, the entry would be even better yet. Now, I admit, that's a long ways away, and a lot can change between now and then, so we always need to be re-evaluating, but without major changes in the background panorama, that would be a long term investment buy entry point that could be very appealing if and when we get there, and something that I would consider a very good example of an "ideal" entry.
On the other hand, an intermediate term swing trader is obviously not going to wait for the next ideal long entry when the current intermediate term swing trade setting up is a short. In contrast with the ideal long entry example just elaborated on above, the IT short setting up is not nearly as ideal however. To begin with, and perhaps most importantly, the short setting up is counter trend. Contrasting these two theoretical entries allows you to immediately get a great idea as to how valuable this exercise becomes when evaluating possible trades and their possible entries. The first is with the trend, and the second is counter trend. Other major differences are the S/R levels which are practically non-existent on the second, and powerfully present on the first. The same can be said with channel work. Momentum varies and confirms on different time frames, but is more positive than negative on the longer term time frames. Price patterns suggest a long term consolidation is in order, and could possibly be the most important reason - next to current bullish price extremes and slowing long and short term momentum - for developing an idealized short entry thesis.
As those of you who have followed this series of articles know, and as I brought together in consolidated summary format in my last article "Let's Talk Multiple Time Frames", I'm looking for an intermediate term short entry in equities. Being a contrarian at heart, and seeing price at historic extremes above their longer term mean trends, my focus is on identifying a possible trend reversal pivot point where an idealized short entry could setup. For the reasons I've outlined throughout this series of articles, I think price is moving up into a possible intermediate term high. What I'm currently keying on is an eventual shift in momentum from bullish to bearish on the daily time frame. Specifically, I'm looking for new highs with bearish divergences at identified target and resistance zones, and that possibility is taking shape. A short entry would be "ideal" if we were to see a momentum shift bearish in combination with bearish divergences in the projected price target zone at upper broadening pattern resistance, and while a momentum shift bearish in combination with bearish divergences at, or around, the lower broadening pattern resistance level would be less ideal, with a failure to reach the projected target being a real possibility, that would also be a very interesting entry point if risk management is appropriate such that some pain could be endured in a scaling in process.
Below is an updated version of the daily chart posted in my last article showing the setup.
The precise entry level tactic to employ here is to sell short on the first close below the previous day's low, but I like to see that coming in combination with some other basic reversal confirmations like a bearish Full Stochastic cross, a turn down on the RSI and the MACD, and a close below the 5 day EMA, for example. Further confirmation comes with an accelerated trendline break, the William's %R falling out of overbought, and a short term hourly topping pattern break, to name but 3 examples of many possible confirmatory indicators (see previous articles in the series for more on that, and the "Let's Talk Momentum" article in particular for more details on shifts in momentum).
Seeing what we see on the daily chart, I'm inclined to move to the hourly to further hone in on an "ideal entry", always keeping in mind, of course, that we're talking about a counter trend trade longer term and being fully aware that I might need to take a stop or two in the process: the hourly may lead me into a trade that is not confirmed by the daily, which would cause me to step back, regroup, and look for another setup at a later date. At present, we see the prerequisite bearish divergence conditions setting up here on the hourly as well. If it looks like we're likely to see a daily sell signal, the hourly becomes very useful when deciding to enter intraday or not, and the same criteria is employed, but only if it's highly likely that the daily could reverse - something like an intraday spike high reversal from major resistance that gives you such a good intraday entry that you'd be likely to come out relatively unscathed should the daily not confirm.
Today we got all the first initial momentum reversal signals on both the hourly and daily time frames (by the slightest of margins on the daily and with EOD bullishness on the hourly) that would constitute a short sell as just described, except that it has happened below my idealized levels. Guess what? I've taken no position. It's also worth keeping in mind that more often than not, the initial break is followed by a rally putting in a lower high, and the same principles can be used to find entries there as well, this time looking for evidence of swing failures and confirmation of lower highs. Unless we're seeing a brief shakeout before the final assault (key intermediate term channel support, short term accelerated channel and horizontal price support, as well as shorter term MA support has still held), my "ideal entry" for a counter trend short as I have envisioned it here will not materialize, but we'll still have the lower high, failed rally to work with . . . or even a slightly higher high with double bearish divergences, which could turn into a whipsawing sideways movement before a final rally into targets with a final triple bearish divergence (a direct hit sometime soon would be the cleanest in terms of probabilities for a final intermediate and long term high in my opinion) . . . you get the idea . . . this game is always a continual evaluation and re-evaluation with the tools at our disposal, and with the current task at hand being the hunt for an "ideal" counter trend short entry.
A great entry is still no guarantee, and, as always, risk management must play a key role in any trading strategy. Price could blow right through projected targets and price pattern resistance, just as price could crash through a hypothetical long at 11,000. While the odds may be low, it's always a good idea to remember that anything can happen and to manage your trade and risk accordingly. When working to establish a counter trend short, you've got to be careful and tenacious as well. You may get stopped out more than once trying to get a trade established. If you are positioning, you'll need to use wider stops. If you are day trading, none of this matters other than being cognizant of the larger trends in place and adamant with your extremely good risk management. Regardless of the type of trading you are engaging in, there are some basic rules and concepts worth knowing and heeding. The 2% rule is a standard that basically says to never risk more than 2% of your trading capital on any one trade. The 6% rule says to never have more than 6% total at risk on various trades at any time. In general, I limit my writings and analysis to TA and leave the risk management to others (your financial planner with your wealth management, for example), and, ultimately to you since you are the final decision maker and responsible party for your actions, but I do comment on the subject from time to time, normally in an attempt to put some cautionary fear into readers' hearts, and if you'd like to read more of what I've written on the subject, you can reference this piece I wrote last year: Risk Management - A Couple of Words.
The logical question regarding exits naturally arises at this point. And if I were to tell you that if you've done your homework, have achieved a relatively ideal entry, and have managed your risk appropriately, "exits are easy", would you look at me incredulously? Well, I'll tell you just that, exits are easy. Yes, profit taking is easy, and fun! If you started with a good entry and respect good risk management, exits are almost second nature: you simply take partial profits as dictated by your risk management! It's really no more complicated than that (it only gets complicated for the "home run hitters" trying to get rich quick, and they almost always end up striking out). If your profit has grown to double your initial risk - meaning that you've doubled your money on the trade - then you'd have 4% at risk, correct? Time to take down 2% of what you currently then have at risk? Absolutely! Pretty easy stuff, wouldn't you say? And when you start seeing the technicals turning against your trade and an ideal entry opposite to your current trade possibily setting up, then it's time to take the rest off the table (always keeping in mind what's happening on all the multiple time frames relevant to your trading horizon). That's when it's time to take a walk in the park, and then you start the hard part all over again.
Well, that's it for this short series of introductory articles. I hope they have been (and will continue to be) a help. I've heard it said that teachers teach what they most want to continue learning, and from that point of view I can assure you that this effort has been highly rewarding for me as author, technical analyst, and trader. The hope is that we never stop learning, and I invite you to join me as reader and contributor on my blog High Rev's Open House, where the door to collaborative TA is always open - and it's free. There's lots more to cover, from Fibonacci trend and reversal techniques, to cycle analysis, to market internals, to sentiment, and more, much more, ever more advanced TA, all to add to what we've already learned, little by little, day by day, in real time. Hope to see you there!