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Are Entry Methods Dynamic Or Static?

06/17/11 08:24:46 AM
by Billy Williams

Price action expands and contracts, which can cause you to make bad entries -- unless you know the two principles for making effective entries.

Security:   AAPL
Position:   Hold

Proper trading consists of many factors like having a reliable trading method, a system for trade management, mental framework, emotional control, money management, risk control, a system for taking profits, and many more. However, the one segment of the trading process that traders of all experience levels obsess over the most is having a method for making effective entries. And with good reason, since a reliable entry method can help you not only enter a trade with precision just as it is about to make a strong move favorable to you, but it can also help prevent you from missing the trade and losing a profitable opportunity.

Every trader misses a trade at some point in their career, but it is especially disappointing when a trade goes on to make a huge move that you missed because you didn't understand the underlying price movement involved. This is also the reason why most traders instinctively know that a good entry method is vital but can't seem to comprehend how to go about developing such a method. See Figure 1.

The reason for this is a lack of understanding about the fundamentals of price action and how it applies to your overall trading approach, particularly with entering a trade in the most profitable fashion.

There are two types of price action, expansion and contraction, that take place in the market. Expansion occurs when price moves from a set point in a given direction until something alters that movement, forcing it into a period of contraction.

Contraction occurs when price lacks the power to continue in a given direction and consolidates within a given range. This is where chart patterns form and trading ranges develop between two price levels, support and resistance.

FIGURE 1: AAPL. Apple Computer has been a strong leader in the stock market that has cycled between price contraction and price expansion. Knowing this, you can see multiple entry points where high-probability trades formed for a skilled trader with the knowledge of how to customize their entry approach in order to maximize their returns and control their risk.
Graphic provided by:
Price expansion is then considered to be dynamic in that it is on the move while contraction is static, since it is caught between support and resistance at some level.

Therefore, to effectively exploit each of these two types of price action, you must approach your entries with a customized approach based on which price action is in play.

For periods of price expansion, you can use entry points that exploit the force of the trajectory by letting the momentum of price's movement trigger your entry, sweeping your trade in the move of the trend like a surfer latches onto the momentum of a wave that forms and carries him toward the shore.

This type of entry is commonly used by swing traders who trade pullbacks or momentum traders who trade breakouts. As price pulls back slightly, the swing trader places his stop just over the top of the price bar that sets the intraday low, letting the resumption of the trend carry it along with the expansion of the trend in progress.

Likewise, momentum traders often trade breakout patterns like the bullish flat-based price pattern when explosive moves on higher volume explode price out of the contracted pattern and carry it higher, triggering the trader's entry just above the resistance line of the flat-based pattern. The explosive price action surges upward while the trader's long order is triggered by the dynamic movement of the emergence of extreme expansion in price, forming a new trend in the progress.

Static entries are more effective in trading contracted price patterns such as the flat-based pattern by identifying the support and resistance points, then observing for price to make contact with each price level and react off that level. For support levels, price will touch support and the price bar making the lowest intraday low at that level will become the trigger point, which is confirmed by the first price bar that closes over the high of price bar with the intraday low.

For shorts, the inverse is true when price touches resistance and the price bar that forms the highest intraday high becomes the trigger point and confirmed by the first price bar that closes below its price low.

In each case, these static entries reveal when price will reverse between these two price levels, signaling a high-probability trade.

As you can see, each entry method is unique and yet, when tailored to the price dynamics in play at the present, can help you gain better precision with your entries but also increase your odds of success at the same time.

Billy Williams

Billy Williams has been trading the markets for 27 years, specializing in momentum trading with stocks and options.

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