5 tips for finding the best trade entry
If you always knew exactly when to buy and sell, you'd be unstoppable. But it's just not that easy. Thankfully, here are a few signs that can point you in the right direction though.
Every successful trading strategy begins with knowing when to buy and when to sell. Whether you're trading stocks, crypto, futures or forex, it's essential you know when to enter the market. However, this can be one of the hardest decisions to make as a trader, and getting it wrong can put your profile at high risk. Ultimately, the goal of any successful trade entry is to maximise the risk-to-reward potential while having a good stop-loss order in place.
To help you reach this goal, we've compiled 5 tips to take into consideration before you start your next trade.
1. Check the RSI
The relative strength index (RSI) is a useful technical trading indicator that can give initial insights on whether to consider entering a trade. The point of an RSI is to help you determine whether a market is overbought or oversold.
The scale runs from 0 to 100, with 0 being the most oversold and 100 being the most overbought a stock can be. It's rare for the RSI to reach 0 or 100, so a general rule is that any value over 70 suggests overbought conditions while a value under 30 hints towards oversold conditions.
Therefore, the first step of deciding whether it's a good time to enter a trade is when the RSI is below 30. However, while the RSI is a good starting point, Tony Sycamore, senior APAC analyst for City Index, told Finder not to use the indicator as your only signal.
"Some caution is required when using the RSI exclusively to pinpoint entries as markets can remain oversold or overbought for longer than anticipated," said Sycamore.
"I use the RSI to highlight divergence," he added. "Bearish divergence occurs when higher prices are not confirmed by a higher RSI reading. Bullish divergence is when lower prices are not confirmed by a lower RSI."
2. Identify support and resistance zones
Starting a trade is all about detecting patterns in the market. Support and resistance zones can be useful in helping you work out when to start and when to exit a trade. Support levels represent the lowest price a stock tends to trade at, while resistance levels represent the highest.
This means you can use past market data to estimate whether the price of the stock is heading towards an upward or downward trend. So, by identifying a support or resistance zone, you have a further clue for when to enter a trade.
"Support and resistance zones are excellent ways to hone trade entries and exits," said Sycamore.
"Markets rarely move in straight lines, which presents the opportunity to enter longs in a corrective pullback towards support. Or sell a corrective bounce towards resistance in a downtrend, allowing traders to enter the market at a better price before the trend resumes."
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3. Analyse candlestick patterns
Candlestick charts are a visual representation of the price direction and momentum of a specific stock. A candlestick pattern is a movement of price that can predict a market movement.
While candlestick patterns receive criticism for being unreliable, many experts still find using the analysis of certain candlestick patterns an important factor in any trading strategy.
"Candlestick analysis is a cornerstone of my trade entries," said Sycamore.
When it comes to candlestick patterns, there are hundreds to choose from. However, two types in particular can help you choose a strategic entry point.
Star patterns are popular reversal patterns. A star is a small-bodied candlestick that is positioned just above the price range of the candlestick before it.
There are three basic types of star patterns. The morning star appears in a downtrend, while the evening star and shooting star indicate an uptrend. As a trader, you can look out for star formations to determine an entry point to the market.
Another candlestick pattern to look out for is the bullish engulfing pattern. This is when a stock opens at a lower price than what it had closed at the day before; in other words, representing a downward price movement. Many traders look for bullish patterns like this as an indicator of when to enter a trade.
If you're confused about the various candlestick pattern names, Sycamore advises not to worry. "I don't believe it is necessary to learn the names of various patterns because there are dozens of patterns, and many have dual names," he said.
"My candlestick analysis is focused on exhaustion and potential reversal patterns to complement other technical analysis techniques within my trading strategy."
While identifying a candlestick pattern doesn't automatically confirm an entry point into a trade, it can provide a good picture of what's happening in the market.
4. Use moving averages
Moving averages (MAs) can be a useful trade entry indicator. MAs are a series of price averages of a stock over a certain period. Using MAs gives you a good idea of how a stock has been performing over certain time-frames.
The most common time periods used for MAs are 15, 30, 50, 100 and 200 days. Because moving averages can be created within a number of different time-frames, it's a popular tool for both short-term and long-term traders to choose when to enter a trade.
The longer the time span used to create an average, the lower the sensitivity to price changes, whereas a shorter time span will have a higher sensitivity to price changes.
As well as creating an easy-to-read overview of a stock price, MAs can assist with identifying support and resistance zones, which as previously noted can help you find the best time to enter a trade.
5. Look for confluent factors
As you can probably tell by now, finding the perfect trade entry point isn't always straightforward. There are many different strategies, theories and schools of thought, all with their own merits.
Relying on a single factor to choose your entry point can be very risky. A successful trade entry should rely on a series of confluent factors. This will be supporting evidence that, when combined, matches up and hints towards a good time to enter the market.
"I am a big believer that if you can find signals confirmed by two or more analysis techniques, it – in theory – will produce stronger signals and potentially better trade outcomes," said Sycamore.
So, there you have it: the more supporting factors that line up, the higher the chances of that perfect trade entry point. Happy trading!
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