Timing Your Market Entry
As traders, we are always looking for an edge in the markets. This week we are going to focus on finding this edge through the market entry technique that we use. You could always enter the market at the current price with a market order if you like, instead of waiting for a more optimal entry point. Over time these types of entries will cost you in terms of slippage and higher cost of doing business. One price tick slippage does not sound like much until you add up all your trades at the end of the month and you realize that for 30 trades, you could have saved 30 ticks in the market you are trading. In the ES (E-mini S&P) that would be about $375. Then look at that over the year you have been trading and it gets expensive.
Once we have located our Support/Resistance levels on our charts, we need some type of timing tool to enter our trade. Below is a table listing the pros and cons of using an oscillator to time your entry.
Simple to follow Tweaking to find optimal fit
Warns of price divergence in trend Many false signals if not used at S/R levels
Works well with the trend or in a trading range Often misused and every buy and sell signal is taken, leading to churning of your account
Figure 1: Pros and Cons of Oscillator Entry Timing
As you can see Oscillators like every other market tool have their pluses and minuses. What else can we add to our trading technique that will tell us it is time to enter the market? How about market patterns? I would like to show you a couple of them I like to use for market entry timing.
The first one I like is the Pause-n-Go technique. This pattern requires two bars to complete. Let's look at the chart below and discuss how this pattern works.
As you can see the market has rallied into a predetermined Resistance point. Bar A has made a new high into resistance. We are now looking for the next bar to make an equal or lower high than the A bar. This will become the B bar. At this point, we have a market that has stopped going higher at Resistance because the B bar could not manage to make a new high over the A bar. This is telling me that the market has lost its upside momentum and is possibly ready to turn down at this Resistance point. At the close of the B bar I would place a Sell stop one tick under the B low. This will have me short the market if we take this low out. If the market continues higher without taking out the B low we look for another set up to get short if we are still near the over head Resistance. If you are filled on this trade you would just place your protective stop up over the swing high which will usually be the A bar high.
Now let's look at another Pause-n-Go from the Buy side.
This view shows the market declining into a Support level. Bar A has made a new low into a predetermined Support level. We are now looking for the next bar to make an equal or higher low than the A bar. This will become our B bar. At this point, we have a market that has stopped going lower at Support because the B bar could not manage to make a new low under the A bar. This is telling me that the market has lost its downside momentum and is possibly ready to turn up at this Support point. At the close of the B bar, I would place a Buy stop one tick over the B High. This will have me long the market if we take this high out. If the market continues lower without taking out the B High, we look for another setup to get long if we are still near the Support level. If you are filled on this trade, you would just place your protective stop under the swing low which will usually be the A bar low.
Notice on this setup that the entry did not come until two bars after the setup. This is fine and happens very often. As long as there is no new swing low below A, you keep using the same setup.
Also, the B bar can be higher than the A bar but cannot be lower. Some of the best setups come when the B bar is relatively small compared to the A bar. This is like a coiled spring and the market tends to have a better follow-through on the break out.
I like this setup due to how it makes me wait for the market to turn in my direction instead of trying to predict that the market will even turn at all. One of the drawbacks to this strategy is that sometimes the B bar can be a little larger than I like. If I feel the risk is too much, I just pass on that trade and wait for another setup.
Now let's look at another setup. This one only takes one bar to create and is a little more aggressive compared to the Pause-n-Go I just discussed.
This technique looks for a market coming into a predetermined Support level. Then we look for a bar that touches our Support level and has the following criteria after it closes.
• Must have a lower high than the previous bar
• Must have a lower low than the previous bar
If you notice we have these conditions with the close of bar A. The entry of this trade is one tick above the high of bar A. This is why this technique is a little more aggressive. Your protective stop would go just under the low of the A bar.
This pattern is telling us that the A bar saw aggressive selling coming into a Support level. If this was good quality selling, would you expect the market to be making new highs of previous bars? This is more indicative of selling exhaustion at Support once we make a new high over the A bar high.
Let's look at the sell side of this technique.
This technique looks for a market coming into a predetermined Resistance level. Then we look for a bar that touches our Resistance level and has the following criteria after it closes.
• Must have a higher high than the previous bar
• Must have a higher low than the previous bar
If you notice we have these conditions with the close of bar A. The entry of this trade is one tick below the low of bar A. This is why this technique is a little more aggressive. Your protective stop would go just over the high of the A bar.
This pattern is telling us that the A bar saw aggressive buying coming into a Resistance level. If this was good quality buying, would you expect the market to be making new lows of previous bars? This is more indicative of selling exhaustion at Resistance once we make a new low under the A bar low.
These entry techniques can be used for any timeframe you wish. I usually find my risk is lower if I see a market coming into S/R on a larger timeframe chart, by dropping down to a smaller timeframe and looking for these patterns at the levels on the larger timeframe.
If you follow the Floor Trader Pivots, these patterns work well on them, too. Just make sure that you have good risk/reward ratio to the next pivot level.
These tools should help you from getting into a market that is not quite ready to turn yet. Are they perfect? I wish, but we all know that tool does not exist. So keep an open mind when using these or any other tool you trade with.
Keep up the hard work with your market studies; the majority of your competition does not.