Executing your trades with confidence and discipline is crucial to avoid costly mistakes, and to ensure your long-term success in trading.
While identifying profitable trade opportunities is essential, how you implement them can make all the difference between success and failure.
As Hedge Fund Market Wizard Colm O’Shea said:
“Implementation is more important than the trade idea behind it.”
Your entry rules (along with your stop-loss and exit rules) are how you implement a trade to capture the opportunity you identified in the last lesson.
Entries vs setups
In the previous lesson, I discussed how to analyse forex markets to find trading opportunities.
In a rules-based trading plan, you then define these opportunities into rules – which I call set-ups.
The set-up rules in the example strategy are:
| Set-up rules | |
|---|---|
Set-up rule #1 | Buy above the 200-period EMA, sell below the 200-period EMA |
Set-up rule #2 | The Market Type indicator must be sideways |
Set-up rule #3 | Bollinger Band Relative Width below 80 |
Set-up rule #4 | Trade only between 7pm to 11pm (SGT) |
Set-up rule #5 | Don’t trade after news events |
Set-up rule #6 | Don’t trade if USD/JPY has already moved 0.6% in one direction that day |
Here is what they look like on a chart:
Once each of these conditions has been met, you then have a further set of rules to trigger your entry.
In the example strategy we use in this course, the entry rule is:
| Entry rules | |
|---|---|
Entry rule #1 | Enter at the close of the candle which breaks out of the Bollinger Band |
Here is what this simple entry rule looks like on a chart:
As you can see, this rule is simple, and acts as the trigger for entering the trade.
Simple entries are better
If you have unclear or confusing entry rules, you will make mistakes.
With money on the line, you will jump into trades prematurely, or fail to enter at all.
Rather you need to be confident when you trade.
This is why we keep entry rules separate from your analysis.
Your analysis can be quite complicated and consider a multitude of fundamental and technical factors.
But once you have identified the opportunity, you need a very simple set of rules that allow you to act decisively.
Stalking your entry
Once your setup conditions are in place, it’s time to stalk your trade.
As Market Wizard Mark Weinstein describes:
“Although the cheetah is the fastest animal in the world and can catch any animal on the plains, it will wait until it is absolutely sure it can catch its prey.
It may hide in the bush for a week, waiting for just the right moment. It will wait for a baby antelope, and not just any baby antelope, but preferably one that is also sick or lame; only then, when there is no chance it can lose its prey, does it attack.
That, to me, is the epitome of professional trading.”
During the stalking phase, you embody that patience. Like the cheetah, there’s no more analysis—only quiet, steady observation.
You wait until one of two things happens:
- the entry trigger presents itself, or
- the setup conditions change, and you move on.
Stalking a trade can also be about timing your entry to maximise the risk/reward ratio. Some traders do this by shifting to a lower timeframe to capture a more precise entry point.
In our example strategy, you might watch a 5-minute chart instead of a 15-minute chart to stalk a potential breakout more closely.
This approach can help you achieve a better entry price by acting sooner or positioning your stop-loss with greater precision.
While this can improve the trade’s risk/reward ratio, it does require more focused monitoring, so it’s not for everyone.
Which order type should you use?
There are three types of entry orders commonly used to trigger trades.
- Market entry: This is an order to enter at the current price.
- Stop-entry: This is a resting order to enter at a set price above the current price for a buy trade or below the current price for a sell trade. This order type is commonly used for trading breakouts.
- Limit-entry: This is a resting order to enter at a set price below the current price for a buy trade or a set price above the current market price for a sell trade. This order type is commonly used for trading pull-backs or range trading.
Resting orders are a valuable tool for traders who want to control the price and timing of their trades.
They allow you to set specific price levels and wait for the market to reach those levels before executing your trade.
You will need to specify which order type you use in your rules.
Such as:
‘Enter at market if… ‘ or ‘Place a stop-entry order at… ‘
Let’s look at how these are applied in practice.
Trading breakouts
When price action breaks a key level or a range, this is called a ‘breakout.’
You can use market and stop entry orders to enter trades if you prefer to trade breakouts.
Here is an example of a breakout through the lower Bollinger Band.
In the case below, you’d wait for the close of the candlestick below the lower Bollinger Band before entering the trade at market.
The breakout is confirmed where the red arrow is printed above the breakout candle. A green arrow is printed below bullish breakout candles.
We built the arrows into the Bollinger Bands indicator to avoid confusion about whether the candle has closed over the band.
Here you can get FREE access to this version of the Bollinger Band indicator for TradingView.
The second way to trade breakouts is to use a stop-entry order.
In this case, you place the order at a set price .
I’ve used both these methods extensively and they both work, although my favourite method is to use a stop-entry order.
The stop-entry order tends to be triggered by price spikes more often.
On the plus side, it’s easier to manage as you don’t need to watch the charts as closely, and it often results in a better entry price than the market order.
You can choose which is the best fit for you.
Trading Pullbacks
If you are trading during trends, you can use either market or limit orders to enter into pullbacks during trends.
Here is an example of limit orders placed on the mid-Bollinger Band.
You can also wait for the price action to confirm that the trend is going to resume after the pullback. In this case, you would use a market order on the close of the candle.
Using Reversal entries
Reversal entries are used when you have identified overbought or oversold conditions (contrarian trades) or are trading a range-bound market.
For a contrarian trade, you can use a market order on an indicator signal or reversal pattern.
Here’s a simple example using our Market Type indicator.
When the indicator is at Level 2, it signals overbought or oversold conditions.
When the indicator ticks back up to Level 1, you would enter at market.
This provides an early entry into a new trend.
You can also look for candlestick reversal patterns to support your initial entry. If you did this, you would have two entry rules instead of one.
In a range-bound market, using limit orders works well. You can place an order to sell at the top of the range or an order to buy at the bottom of the range.
Some traders prefer to wait for the price action to confirm the range is going to hold, so will enter at market once they get a reversal signal.
The art of scaling in
Scaling in to a position is when you place a number of trades over time and at different prices, with the goal of building a larger position.
The goal of scaling in is to build a large position so if the market moves in your favour, it will generate a significant profit.
As the trade goes for you, you can add positions, and you have the profit from the original position to cushion you from any fall in price.
This keeps your overall risk at a manageable level, whilst at the same time keeping open the potential for a massive winning trade.
In my day-trading, I don’t typically scale into trades, but my most profitable trades have been long-term positions where I have high-conviction ideas and have scaled in multiple times.
How to scale into a position
To scale into a position, you continue to add trades in parts until you have reached your maximum size (as per your position-sizing model).
For example, if you have a maximum trade size of $300,000, then your first position might be $100,000.
As the trade moves in your favour, you continue to add to the position in $100,000 increments, normally raising the stop-loss on the entire position each time (we’ll discuss stop-loss placement in the next lesson, ‘Setting stop-loss orders to minimise risk.’)
Here is an example of scaling in on the weekly chart of USD/JPY.
Final thoughts
Mistakes in trading often starts with a confused approach to analysing and stalking opportunities.
Analysing the market is a separate activity from entering your trades, which is again different to exiting your trades.
If you don’t separate these steps you will be overwhelmed with information when you need to be decisive.
In the next lesson, you’ll determine where to put your stop-loss to avoid losses, while maximising the risk/reward of your trades.
Till next time,
Sources
Marketmates uses only high-quality sources, including peer-reviewed studies, to support the facts within our articles. Read our editorial guidelines to learn more about how we fact-check and keep our content accurate, reliable, and trustworthy.
- TradingView – Charting software TradingView.com/chart
- Jack D. Schwager – Hedge Fund Market Wizards: How Winning Traders Win https://www.amazon.com.au/Hedge-Fund-Market-Wizards
- Dr Van K. Tharp – Trade your Way to Financial Freedom https://www.amazon.com/Trade-Your-Way-Financial-Freedom
