So far in this series about building a solid trading strategy, I’ve gone over time frame, trend direction and using higher time frames and trend direction to filter trades. Now it is time to go over what most traders focus on when creating a trading system… entry signals. Basically, when do I pull the trigger and buy or sell in the market?
Before I start, I want to make one thing clear…
When to enter the market is not necessarily the most important part of your trading strategy.
Many traders think that if they can just nail down the right entry signals, nothing else matters. This is just not true. While deciding when you are going to enter the market is important, the other characteristics of a solid trading system are just as important or even more so.
Entry signals get a lot of attention because the topic is exciting, and things like money management and trade management are boring. But if you want to be successful, you cannot just focus on the things you like. You need to create a trading strategy that addresses every characteristic of solid trading, even the boring stuff.
Obviously your trading strategy needs a set of rules to tell it when to get into the market. I’m not going to claim to have the magic entry that always wins and can make you rich in a month. Frankly, that is not what you should be looking for either. I just want to go over some issues you are going to have to come to grips with when building your trading strategy.
Types Of Entry Orders
There are a few types of orders you can use to get into the market. Some wait for price to reach a certain level in the market before taking action, and some are immediate.
Pending Orders: A pending order is an order you place above or below current price action. When price reaches that level, an action (Buy or Sell) takes place.
- Buy Stop Orders: An order is placed ABOVE price action. If price reaches this level a Buy trade is entered.
- Sell Stop Orders: An order is placed BELOW price action. If price drops to this level a Sell trade is entered.
- Buy Limit Orders: An order is placed BELOW price action. If price drops to this level a Buy trade is entered.
- Sell Limit Orders: An order is placed ABOVE price action. If price reaches this level a Sell trade is entered.
Market Orders: A Market Order gets you into the market immediately. If you you want to take action at the current price level, you use a market order to Buy or Sell instantly.
Types Of Entry Signal Criteria
There are limitless ways to get into the market. They can range from the very simple to the incredibly complex. Here are some types of entry signals that can be used either alone or in combination.
Time Based Entry Signals – At a specific time a day, you place a market or pending order based on previous price action.
Set And Forget Entry Signals – These are either market or pending orders that you set up once, and then let price run to either the take profit or stop loss. Orders that have not triggered or are still running are normally closed the next day when new orders are placed.
Straddle Entry Signals – These are pending orders that straddles market price. At a certain time a day you place a Buy Stop order above price and a Sell Stop order below price. (These are normally set and forget style trades where you set take profit and stop loss for each order and come back the next day to see what happened).
Price Pattern Entry Signals – There are many price patterns (triangles, wedges, head and shoulders, etc.) that can be used to determine when to get into the market. There are also Harmonic Patterns (butterfly, bat, etc.) that have their own trading rules.
Candlestick Entry Signals – Candlestick patterns can be used to determine market reversals or continuation moves and pinpoint entries.
Divergence Entry Signals – Divergence happens when price action and an indicator (like MACD) are out of alignment. For example, price is trending up, but the MACD is going down. The thought is that price will follow the indicator at some point, and can be used to look for trade opportunities.
Indicator Alignment Entry Signals – There are thousands of indicators. There are also thousands of different settings for the indicators. This makes for a unlimited combination of indicators that can be put on your charts. When these indicators line up for a buy signal, you can enter the market long. When the indicators line up for a sell signal, you can enter the market short.
2 Considerations Regarding Entry Criteria And Expert Advisors
Since we are primarily talking about programming a trading strategy into an expert advisor, there are a couple of things you should take into consideration.
Complex Is Not Always Better – Many people think the more entry criteria they have, the better and more accurate the system will be. But that is not always the case. Sometimes a system can be so complex you get conflicting data which makes making a confident trading decision impossible.
The point of your entry criteria is to give you an edge in the market and identify high probability opportunities. You are never going to be able to create a system that wins all the time… so don’t try. Identify entry criteria that gives you an edge and avoid trying to search for the Holy Grail of trading systems.
Limiting The Times Of Day You Enter The Market – A lot of people want to build robots because they can look for trading opportunities 24 hours a day. I agree, this is one of the benefits of programming your strategy into an expert advisor. However, limiting the trading times might increase the effectiveness of your system.
The market is more active at certain times of the day like during the London open or when the London and New York markets are open at the same time. Sometimes limiting the hours a day your robot can trade improves accuracy and profitability.
Read the next article in the series: How to decide where to place your stop loss and take profit
Scott Gaul says
In the past I’ve been skeptical about your claim that the entry condition is not the most important criteria for a good trading program. But I’m programming a new EA trading program right now and it loses a small amount consistently. It seems logical that if it’s losing I can just swap the buy and sell — just reverse the direction of the trade — and it should make a profit right? Not so it still loses. So there’s definitely more to this than finding the right entry timing or logic.
Shaun Overton says
Good point. Situations that you described almost certainly means that you’re overtrading. Most people want to trade hyperactively for entertainment. They forget that it’s a business. It only makes sense to pull the trigger when you expect to make money.
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