As an intermediate term trader, I had always considered entries to be the least important aspect of my trading. After all, the Golden Rule of Trading – "cut your losses short and let your profits run" – is all about exits. And a few studies have shown that you can make money consistently with a random entry, provided your exits and position sizing are good.

So, when I began to short-term trade, I was more than a little shocked at my miserable performance, much of it to do with lousy entries. I was learning that entry becomes more important the shorter your trading time frame, and, as Tony Oz says:
“Good Entry = Easier Trade.”

Most stocks make their biggest moves shortly after the open and it was here that I was having my biggest problems. I didn’t know what to expect, or when might be an appropriate time to enter. Entries, to someone new to short-term trading, can be very confusing, particularly shortly after the open.

I’ve categorizing entries into three broad groups and have compiled a guide to help make some sense of them:

• Reversals
• Continuation
• Gaps: reversal and continuation

PD = previous day
BO = break out
IPS = initial protective stop
S/R = support/resistance
PB = pull back
L2/T&S = Level 2, Time and Sales
SO = stopped out

Market opening: entries for continuation trades

For my own trading, I choose to consider entry after the first 5 minute bar is complete, although many experienced traders recommend waiting 15 minutes or longer.

PD (previous day) close at extreme of PD range, i.e. no overhead resistance

1. Off the PD close: you can use a Full Position

2. From below PD close, or a quick dip down off the PD close and then BO (break out): Full Position if only a shallow swing down and move up; but scale-in 1/2 positions if it opens on a small inside gap or has a deeper swing down before the BO

3. Slight outside gap: a lower probability trade (some traders suggest not taking this kind of opening trade). The most likely action is for a dip down and bounce off the close, in which case you can either use a full position, or a partial position as it bounces of the PD close or support and another as it BO above the open, preferably on higher volume. However, if you do take the trade on a move up from the open, scale in with no > 1/2 position.

4. Inside gap and deep swing down before and extended move up. The most likely action is for the price to come back to the close before possibly moving up again. You can scale-in on the BO and again on the PB to the close, but keep tight stops just below the close.

PD close is inside overhead resistance

1), 2), and 3): Wait for a BO above PD overhead resistance.

1. Generally, if the stock trades right through overhead resistance, it is not a good setup and is liable to less follow-through.

2. If overhead resistance is small and the stock makes a bounce before taking off, you can use a full position as it BO above resistance.

3. A bit trickier: It may depend on the distance to the overhead resistance, but if it moves straight up from the PD close, you may expect a PB (pull back) to S/R (support/resistance). (Consider scaling-in, 1/2 on the BO and 1/2 on a possible PB.

4. Just enter with a full position if this happens, after the first 5 min bar has printed.

Entry within the PD range

Enter within the PD range provided there is a large enough price range without significant resistance to the PD open or other possible overhead resistance. Entries as above.

Enter on the BO above the PD high, or pass on the trade

This obviously all depends on the range between significant S/R, how much potential S/R there is, and how far to the PD high. In this particular case, you would either pass on the trade or enter in the BO of the PD high if it was not too far from the open and the GM was still acting well.

Enter on the BO of PD high, or possibly within the PD range

Generally, you want to enter the trade as it BO above the PD high. On some occasions with sufficient range between S/R, you may enter intrarange. After a reasonable run up, either expect the price to test the PD resistance before BO or at least PB to the PD S/R: scale-in the position. If the stock trades right through overhead resistance, it is not a good setup and is liable to less follow-through.

Consider this from Tony Oz: “I find intraday continuation patterns to be of extreme value in my stop loss placement strategies. I will often use the price levels of the low and the highs of the intraday continuation patterns as legitimate levels of support and resistance especially, if I cannot use any other price level according to may Reward/Risk formula. ...I (will) enter a partial position many times when a stock is forming its continuation pattern rather than when it breakouts out of it. I do so for many reasons. The main reason is that entering a position while the stock is in a continuation pattern gives me the opportunity to place a very tight stop loss. The reward many times is worthy of the risk. I will also do so if I think the stock would explode if it was to resolve the continuation pattern, in which case I would like to establish a partial position.”

Special entry/re-entry – continuation

• Stock opens near PD close. At around 09:50 to 10:00 reversal period, the stock drops below the open and holds at PD S/R. Enter a partial position if you get a small/bottoming bar on light volume followed by a spring bar on higher volume. IPS (initial protective stop) just under support.

Consolidation/Slim Jim entry – midday setup

• If you intend to trade the afternoon session, look for these setups in stocks that have had good run-ups and reach a high between 1030 and 1200. They them PB no more than $0.5 or the stock’s average wiggle, and are consolidating through the midday doldrums. For range-bound consolidations look for closes in the 5 min candles at the top of the range toward the anticipated BO point. Either enter partial positions in the consolidation (ref: Oz) and on the BO, or full positions on the B, as you would with a Slim Jim.

Continuation:

Reversal entries:

Outside Gap entries

1. (See 2)

2. Fade a big opening outside gap. Don’t bother looking for a continuation trade here.

3. You may bracket this price and take the trade if it reverses or if it’s a continuation gap; or just pass on the trade.

4. (See 5)

5. Are high probability trades using the Windows set-ups if this gaps outside the PD low. This kind of action would signify the start of a possible reversal bar. Some traders recommend entering as the price breaks above the PD low, but you should consider entering an outside gap nearer the open.

1. Generally, don’t trade big inside gaps.

2. Aggressive: consider selling this open if it moves down at all on L2/T&S momentum. Or, conservatively, if it consolidates near the open, sell the breakout; or wait for a later entry provided it has not moved > 0.4/0.5 points off the open.

3. Sell short if it reacts quickly off the PD high/close resistance and immediately begins to sell off. Direction is confirmed when the stock penetrates the open.

4. Obviously a potential long trade if it immediately moves up off the open and meets resistance for 5 to 15 minutes and then BOs. If the stock trades right through overhead resistance, it is not a good setup and is liable to less follow-through.

5. LC claims that this is a high probability trade when using the Windows setup. The stock opens on an outside gap and reverses immediately, then spends at least 5+minutes at the support level before penetrating it. If the stock trades right through support, it is not a good setup and is liable to less follow-through. General advice is to buy at it breaks support, but you might consider entering on the gap reversal if sufficiently large to give you a 3+ r/r ratio before possible s/r.

• Following the first low, the stock rallies. See where the rally tops and follow the PB very closely. When the stock ticks up again, look to enter a long position. Place the IPS under the PB, which is violated here and we’re stopped out. Look to re-enter when the stock puts in another low for the day. Watch the next rally, and if it the PB does not take out the low and begins trading higher, re-enter the position and place the stop under the PB.

Again, from Tony Oz: “Often, if the stock held either (the first bottom or the subsequent PB), it will trade higher and take out the high of the day. (Instead of waiting) until the stock takes out the high of the day and enter it then (I’d rather enter at the two buy points in this illustration) where the reward to risk is absolutely the greatest. An entry over the morning high can spell a shaky position.”

None of this is original work but merely a compilation of ideas taken from some great traders and educators. I thank them for making this knowledge available, and hope that this little guide might help fellow novice short-term traders who are looking to make the trade a little easier.

If you have any comments or questions, please contact me at: alan.brooke@wanadoo.fr

Alan Brooke

References:
On random entry, see V. Tharp ‘Trade Your Way to Financial Freedom’ et al.
Tony Oz: ‘How to Take Money from Wall Street’
Barry Rudd: ‘Stock Patterns for Day Trading’
Toni Turner: ‘A Beginners Guide to Day Trading Online’
Kevin Haggerty’s TradingMarkets.com articles

Alan Brooke trades full time from his home half way up a mountain in the French Alps. He traded for a few years in the mid '80s and then returned to trading just in time for the last great bubble of the 20th century. He finally discovered what he was supposed to be doing when he became a TradingMarkets member last year. He does not play golf or trade in his underpants.