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Best Entry Criteria

I have determined that I want to buy a particular stock, based on daily and/or weekly charts and technical analysis. Now, I have gotten burned several times because of my short term entry. Once I have the stock pick, what is the best short term strategy/guidelines to actually enter to minimize early on losses?

Comments

  • markdmarkd mod
    edited February 1
    If your indicators are using default parameters, the pros KNOW you are coming. They can see those indicators, too. They short enough stock to drive you (and many others) out so they can pick up your stock cheap for the main move. You could try to put your entry where you would have put your stop and see how that works out.

    As a general rule, if you are doing a long reversion trade (buying after a down leg in an up trend), you want evidence the sellers are done. So, you want to see at least one day of capitulation in the down leg (usually higher volume, higher range, and a down close). Then usually more but weaker selling - range and/or volume contracts, wicks and/or tails are longer and bodies shorter. Then buyers take a shot and the market closes up. This is the test - how do sellers react to buyer strength? If they can't make a new low in two or three bars, the new direction is probably up. Sometimes there is only one test, sometimes two or three. If there is a new low, it should be on a long tail. But, get out if buyers don't follow through on the weak seller reaction.

    Using an MA, this pattern might be - a falling very short term MA, like 3,4,5, then a close above the MA, then a reaction that doesn't make a new low. Enter back above the short term MA with a stop below the reaction. In an uptrend, buyers should follow through within a couple of bars. If they don't, think about cutting back on getting out.
  • markd makes excellent points. One thing I'd add. If you are using daily and weekly charts to make your determination to buy, I'd assume you are looking at a longer term holding period, and that your expectations in your system is that there is a significant move ahead possible.

    Don't be short sighted or greedy to attempt to scalp a few %points more by using even shorter term charts. If the move you expect is 30% based on your analysis and system, then buy it at that point.

    As far as minimizing on losses, I'm not a trader so I have a different mentality. If your system has a positive expectancy then you have to use it the way it's designed. If you are unable to achieve the results that your system projects, you either, need to change the system to be something that you can follow, or change yourself to just follow it. Losses are a part of every system, and many people get absorbed into minimizing losses and it's usually at the expense of added exposure to gains.

    I use Point and Figure charts for my "system" and they offer a clear point showing where I'm OK to buy, add or hold, and where I'm not OK to buy, add or hold. I don't second guess my system and there are the ones that get away from me with a sharp move before I've entered. That's OK with me as there is ALWAYS another train coming into the station.

    If you've gotten "burned" recently, don't worry, February and March will offer new opportunities. If not, April is coming, and so on. If your system is sound, it will work well. If it's not, you'll find out in a bullish environment, like we are in now.
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