A Trade Entry System - Rules Based Trading Part 2

A Trade Entry System – Rules Based Trading Part 2


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I’m guilty!  Sometimes I get caught up in the analysis of a price chart just because I enjoy deriving “messages from the market” by studying them.  At some point, we must pull the trigger and get in the game, or we are here for entertainment only.  I prefer having defined criteria that “tells me” to enter.  That’s rules-based-trading.

“Identifying a good entry” generates several trading rules for an individual.  Perhaps a good place to start in framing the criteria of a good entry is with your preferred time frame.  Your selected time frame should be compatible with your character.  Most traders start trading in shorter time frames and then gradually expand to longer ones, partly due to fear and general inexperience.  A good rule of thumb is for your time frame to reflect your willingness to hold a winner, not your tolerance for risk.  Trades need a certain amount of time to develop.  In order to take full advantage of this, knowing which time frame you are most comfortable with helps you stick with the potential winners.

Successful traders follow a trading system (or method) that has demonstrated high probability trades.  This could be based on finding equities that are undervalued, taking long positions, and holding them until others within the investment community discover their value, too.  Or it could be a simple trigger set off by a technical indicator, i.e. when the MACD line crosses from below to above the zero line.  Or perhaps a confirmed technical entry using a combination of momentum and trending indicators.  The combination of fundamental and technical criteria must also match your comfort zone.  Which criteria inspire your confidence?

Another habit that separates winning traders from mediocre ones is their ability to build a Trading Plan.  This is not the same as a trading system.  A trading system identifies triggers to get you into the trade.  A trading plan accounts for what happens after that.  The plan addresses the parts of trading that are most fully in your control.  Basically anything that involves you taking action or not taking action, independent of the actual market, is spelled out in a trading plan.  Your trading plan can be followed 100 percent of the time because it is an expression of the sum total of what your rules are designed to create.  It controls your behavior, which is a reflections of discipline and willingness to follow those rules.  When your trading system is wrong, your trading plan will help you minimize the loss.  When your trading system is right, your trading plan will help you maximize the gains.

Finally, we trade in terms of probabilities.  All attempts to profit from a trade are in reality a best guess regarding future price action.  There is always the possibility that prices won’t respond in the anticipated direction or won’t respond in a time frame you are willing to trade in.  Reducing your choices to the best probability before you enter a trade is what we’re after.  If you have done a proper assessment of general conditions according to your trade plan, there will be a point where prices are more favorable for an entry and will respond by an advance in the direction of conditions.  To improve your odds of timing your entry better, develop a series of “if-then” scenarios and ask yourself which is more likely.  Your goal as a trader is to go with the path of least resistance, and that is a factor of probabilities not analysis.

In conclusion, there are many considerations when developing your entry criteria.  Rules-based-trading requires we take the time to understand and develop the criteria for this critical step according to our personality and comfort level.  Remember, “The longest journey begins with the first step.”  – Lao Tzu

Emilu Bailes
OptionsANIMAL Instructor

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