by Amanda Harvey
The entry strategy applied by a trader goes a long way in determining the ultimate success of the trade. There are many tools and techniques that can be applied to developing a successful strategy for entering a trade. The very first part of any trading strategy is determining whether a particular stock or option is showing the potential for a profitable trade. The criteria for selection of securities to trade will depend largely upon the style and goals of the trader. An options day trader will obviously be more interested in immediate price movement, whereas a buy and hold stock trader will look more for growth potential.
Selecting Stocks or Options to Trade
Some form of analysis is usually the cornerstone of choosing securities to invest in. Once a trader has determined their criteria for selecting stocks or options, they can then decide which type of analysis best fits their trading requirements.
Generally speaking, technical analysis is best suited to traders with interest in short term price movement and less concern for the fundamental value of the security. Technical analysis is very useful for determining trend direction, strength, and probable continuation or reversal of a trend, based on price data. Using the insight obtained from this analysis, a trader can make informed choices of which trades offer viable opportunities. Technical analysis can also assist in pinpointing the most advantageous time to enter a trade, making this type of analysis an important component of creating an entry strategy for short-term traders.
For longer-term traders, fundamental analysis may play a bigger part in determining the viability of a certain security as a trading vehicle. Choosing securities with a solid performance record and healthy projections is typically the aim of using fundamental analysis. Companies with high intrinsic value and a positive growth outlook are very likely to reflect this growth in the price of their stocks, at least eventually.
A popular entry strategy for investors seeking a mid- to long-term investment is to find a time when securities with strong growth potential are trading at a fair price, or are even undervalued. Technical analysis can be used to help identify the most beneficial times to invest in these securities, making it a useful tool for longer-term traders to incorporate when developing their entry strategy.
There are many indicators which a trader can use in determining the best possible time to enter a trade. Most indicators demonstrate specific signs and these alert a trader of the likelihood that it is an opportune moment to enter a trade when these signals are present. These signals may occur when the indicator has a particular relationship to the price, such as when it crosses above or below the price line. Other indicators, such as channels, present an entry signal when the price breaks out of a certain range. Using one or more indicators in conjunction with analysis can be very beneficial in creating an effective entry strategy.
Charts of price data can be used to identify certain patterns in the price movement. These patterns can be analyzed, and the information obtained provides signals in regard to the probable future price movement. Most chart patterns suggest either that the current price trend will probably continue, or that a reversal is imminent, and at specific points in the pattern an entry signal is generated.
Creating and implementing an effective entry strategy is imperative for success in trading. There is a plethora of tools available to the investor, and these can be broadly grouped into three main categories; analysis, indicators, and chart patterns.
Choosing a great security to invest in but the wrong time or price at which to enter the trade can negate the potential advantage of the trade. The three basic components of a solid strategy address the questions of what, when, and how much. First the investment vehicle must be selected, then the best time to invest identified, and thirdly, the price at which it is most opportune to enter the trade determined.