4 fundamental entry signs for trading and why they are not that important

Much has been written about when to buy stocks, forex, or other instruments. In fact, it is the topic that is written the most about in trading. As if there’s nothing else to trading than timing your entries. On the contrary, I have come to realize that timing for entries is actually the least important aspect of a trade (see a real world prove below). Nevertheless, it is still a factor for consideration in a complete trading strategy. As such, this post is about the 4 fundamental entry signs that I use to enter in any trade. No matter which trading setup I am using, I only place my order because one or more of these conditions are met.

To make sure that everyone is on the same page. Let me define what exactly I am talking about here. I define the act of timing for an entry as the process for deciding where or when to place an order after a signal has been flagged by a trading setup. In particular, it would be step #8 according to my FTC setup.

For example, if the conditions to buy USDCAD are met on the daily chart, then I will zoom in on to the 3-hour timeframe to spot a confirmation of the move. Once that is also satisfied, I zoom in even more to the 30-minute chart to spot when (if market order) or where (if limit order) to place the order. Figuring out exactly when and where to place your bet is a topic for much discussion, even when you know that you want to buy it somewhere around this level. The better the price, the better your reward/risk will be. Wait too long, and the market could leave you behind.

Long story short, when it comes down to it, there are simply 4 fundamental entry signs for buying in any market that I use. I only buy at/when the price is:

1. at a support area
2. at a Fibonacci retracement level
3. at oversold conditions
4. showing accumulation by large players

(and vice versa for shorting a market)

These are necessary, but not sufficient entry conditions. One or more of these conditions must be met for all trades. But satisfying these conditions would not guarantee profitability. I know I’ve repeated this many times now, but I can’t stress this enough. This is just one small step of a thorough analytical process in deciding your trade. Don’t go around buying everything on support levels or when RSI goes over 80.

The reason why I find it necessary to write about something so trivial now is that I have just been caught trying to catch a top again. Take a look at the figure below illustrating my trade orders trying to catch a USD/CAD short-term top. My trading setup flagged for a short USDCAD trade. So I gave it a few tries. Eight times. Eight!

If only I had remembered my 4 fundamental entry signs, I wouldn’t have tried to short this pair all over the place and getting stopped out again and again. If I adhered to these 4 signs, I would have only tried it a couple of times at 1.0480 resistance and then let it pass once the condition is violated.

On the other hand, as I was saying earlier that the entry is the least important aspect of a trade. I came out of this mess as illustrated unscathed. I managed to exit all of my entries at break-even, or at least close to it. So even failing 8 entries, my account balance barely budged.

Recall I said timing for entries is the least important part of trading? Well, this is a good example of it. You could mess up your entries, 8 times, and still come out ok.

You probably know this already, but I’ll say this for the sake of thoroughness. By far the most important aspect of a profitable trading strategy is prudent risk management. That is what saved me in this embarrassing shorting USD/CAD example.

USDCAD, 15 minute, with order history

EUR/USD +95 pips in 2 hours: An example of swing and day trade convergence

I had my best day-trading day this quarter on November 27. I made 95 pips in two hours at the open with only two trades. This post is a review of my trades that day for my future reference. To save you and myself from reading, the two reasons for this good run are:

1. Convergence of intermediate term signals with day trading signals
2. Ignoring my bearish sentiment (Dubai news) and traded what I saw from the prices

Before moving on, let’s start by setting the stage with some background information to summarize what conditions were like that day.

Background

The news on November 25 after NY close of Dubai World delaying their debt repayments sent the dollar and yen soaring. I made my first 400+ pips trade by being at the right place and time on this panic wave. The U.S. market was closed that day but FTSE sold off more than 3% the day after the news. So the expectation was for US to do a catch-up sell off when it opens again on Friday 27th. Risk aversion (equities down, yen and dollar up) was the talk of the day.

Figure 1 below shows the charts of ES futures (e-mini S&P500). Left is a 1-min. from midnight of 27th to that morning’s NYSE opening. Right is an hourly showing the move overnight from 26th to 27th.

ES Futures (e-mini S&P 500)

Intermediate term signal

Figure 2 shows my intermediate term signal. EURUSD has been printing an uptrend on the daily (not shown). Figure 2 shows that EURUSD was testing the bottom of my channel so I should consider going long. Notice that this is the same channel that called for the 1.5150 top on 25th. At least it has proven itself useful once.

EURUSD, 3-hour

Short term signals

For the short term signal, we need to go back to Figure 1 for the ES charts. ES tanked 40 points over the holiday with very low volume. It made it all the way to 1067 just before 3am on 27th. Then it lifted all the way to 1080 at 9am. 1080 is the line in the sand for the bulls and bears. So retracing all the way to that level before opening is significant.

This pre-open strength in ES was the sign of oversold for me. This is the short-term confirmation I needed. I entered my first position to long EURUSD @ 9:09 am to test the water.

Then I watched both EURUSD and ES closely for the next half hour. Once NYSE opened. I noticed that the TICK was relatively mellow with readings around -250 to -500. It’s unusually good for a -20 points open drop on S&P 500. One would expect at least -800 readings for a strong negative sentiment. So after watching EURUSD, ES, and TICK for about 10 minutes, I entered a second position on a weak retracement at 9:39 am.

The exits

For my exit, I took profit at 1.5180 because it’s the 50% Fibonacci level and it’s also the top of another of my channel (Figures 2 and 3). After about 10 minutes of watching the 1M bars, EURUSD failed to clear that resistance, so I took profit on the second half to go flat in this pair just before 11 am because it’s an early-closing Friday (NYSE closing at 1pm).

The gains were +95 and +93 pips for +0.27% and +0.28% in my demo account total. Not bad for holding for 2 hours.

Update: Thanks to Jeff on Twitter for the question. I updated Figure 3 with the Fib. levels and showed the top and bottom used to draw it.

EURUSD, 30 min.

Conclusion

In summary, I started with an intermediate term setup that aligns with the major trend. I observed the reaction of the markets on an important news. Identified an oversold condition from the short-term charts for a short-term positive divergence signal. Scaled in a position. Then added more with another confirmation. I scaled out when the target was hit.

Recommendation

Once again, I could have been more aggressive on this trade. As shown in Figure 3, 1.4920-4930 was a short-term resistance. I could have added more to my position when that level broke, with a stop at 1.4900.

AUDJPY Short 81.37/77.17: Anatomy of my first 400+ pips trade

420 pips in my demo account to be exact. Still, I feel very lucky.

In this post, I will review why I entered this position, why I added to it, and why I exited. The goal is for myself to learn from what works and what can I do to improve on this trade given some hindsight advantage.

The Signal

See Figure 1 on the daily chart of AUDJPY (first entry price pointed with blue arrow). Notice the lower highs, with the 2nd high inside my fChannel and the 3rd (last, just before entry) high below a yet longer term fChannel. Plus 1 point for the lower highs and another 1 point for the highs moving into the channels. Two points here.

AUDJPY

The Choice

While both AUDJPY and AUDUSD seemed promising. I focused on AUDJPY because the Yen seemed better poised for strength. I discussed my method of choosing a better counter currency for trading in another post, so I won’t discuss it here. However, as this trade became more and more obvious and into the green, I diversified my short by adding shorts in NZDJPY and NZDUSD. Those two netted around +100 and +250 pips also.

Another plus 1 point for picking and choosing.

The Confirmation

What really gave me confidence in this trade is the price action in gold in comparison to the Aussie. Figure 2 shows the Gold Futures price (/GC, lower left) and Australian dollar futures (/6A, middle left). Notice that gold has been trending up steadily for days but the Aussie made a lower low. That’s a negative divergence. Plus 1 point.

4-hour charts of forex markets, gold, and crude oil

The Timing

For timing this trade, I observed the intraday movement of AUDJPY, EURUSD, and other related pairs. The most obvious sign of Aussie weakness was from comparing the price action of EURUSD and AUDJPY. The 3-hour charts of EURUSD and AUDJPY are shown in Figures 3 and 4, respectively. Notice on Nov 24 and 25, EURUSD trended higher and made a new high. At the same time, AUDJPY barely moved on the 24th and squeezed even more on 25th. The difference was even more noticeable when I was watching the 30-min at the time. I had thought that my datafeed was lagging when AUDJPY barely moved yet EURUSD was rocketing up.

Plus 1 point for the 3-hour price action and then another 1 point for the 30-minute price action (not shown).

EURUSD, 3-hour

AUDJPY, 3-hour

The Entries and Exits

Six points total for the trade, time to establish a position. You can see my orders in Figure 4 above. My first entry was Nov 25 15:12 at 81.37 with a half position. It is marked by a yellow triangle at the cliff beforethe dive (how lucky). I added another half that evening 23:06 at 79.94. I was waiting for a 50% retracement to 80.50 to add but that didn’t seem to be happening. So I added 1/2 when AUDJPY failed to break 80.0 with a strategy to add another at 80.50. But 80.50 never happened and it took another dive.

My exits are determined at the time as usual by using stops. I simply keep moving the stop along and narrowing them once we break support level. After the move became vertical, I zoomed out to the daily chart to view potential targets. The 77.0 and 76.00 levels (as shown in Figure 1) became my not-be-greedy targets. I had my stops really tight at those point and even had a take profit set for half the position at 76.0, but that level wasn’t tested before I got stopped out.

The two red dots at 77.17 and 77.08 are my stopped exits as shown in Figure 4′s last bar.

The Conclusion

What made this lucky trade happen is that I had spent a lot of time analyzing it from different perspectives and watching the intraday price actions for days. I also took my time to scale in and out to minimize my risk. To make this a habit, I will use this point counting system from now on to help me analyze more and trade less.

One thing that I’d like to improve upon is to be more aggressive on a winning position. How? That will be saved for another post when I figured it out.

EURCHF breaking 1.5100: A textbook perfect breakdown and reversal

Last night, EURCHF finally broke below the 1.5100 zone after weeks of consolidation around the area. See Figure 1 for a daily chart of EUR/CHF. I just happened to be looking at the charts when this breakdown occurred last night so I made a few day trades. These scalps turned out better than I thought because a particular technical analysis phenomenon worked really well on this move. Referring to Figure 2, a 5-min. chart of the move, you’ll notice that I’ve marked some Fibonacci levels on each of the big dive in prices.

While there are several Fibonacci levels that are notable and commonly used, I pay attention to the 50% retracement level almost exclusively. A half retracement is easy to spot even with the naked eyes without any technical analysis so even those that don’t use Fibonacci can see it. With this hypothesis in mind, I shorted EURCHF a few times last night on the bounce to 50% of each of the move.

The first entry was at 1.5048. EURCHF retraced about 50% after that big dive from 1.5080 to 1.5030. Then it formed a descending triangle on the 1-minute with the support at 5050. A nice round number support level. The entry was triggered near the end of the triangle and right when it broke the support. I held on to this short looking for the move to take us all the way down below 1.5000 since there’s bound to be lots of stops there (which never happend last night probably because of SNB intervention). Before that though, we made another quick dive and then retraced 50% again. I shorted some more with a limit order placed at the 50% level before hand. So I had two positions sitting from 5048 and 5039. See Figure 2 at the bottom for a chart with the levels marked.

However, by the third dive, it is now obvious that the move down is getting smaller and smaller. Then when the 50% level of that last move held for like eternity, and numerous tests of resistance at 5030 failing yet didn’t back down by much every time, I took profit at 5027-5028.

The reward/risk ratio were impressive with these trades. I risked a few pips to make 10-20 pips. However, one mistake I made which made all these efforts wasted. Simply put, I did not have enough position size to make these pips gained worthwhile. Being used to swing trades with much bigger stops, I merely used my usual lot size for these trades. The reason being that I didn’t expect these to go so well since I’ve always been burned by day trading and was just testing the water with these days. Oh well, these could all have been just because I was lucky last night.

In hindsight, I could have saved myself from all that stress and made a lot more simply by betting on SNB intervention as many traders have done. Recall my lesson on fundamental analysis and the SNB pegging up the EURCHF market? Well, last night presented a great opportunity to profit from that open secret again when EURCHF tested 1.5000. The reason why I didn’t go long is because it was just too obvious that SNB would come to the rescue. I thought that they would have waited for running the stops below 1.5000 before intervening (note to self, don’t second guess). Well, it seems that obviousness works. The optimal entry for a long EURCHF would have started at the point when I covered for the same reasons. I should have eased in a long position around 1.5030 with stop at 1.5000. A reasonable profit target would have been 1.5100.

Why 1.5100? Aside from that the fact that it’s an obvious resistance, this is just something I noticed while drawing up the chart for this post. In Figure 2, I’ve drawn the 161.8 % Fibonacci extension levels for those 3 down moves discussed. See that they formed the reversal targets perfectly with equally impressive textbook perfect consolidation reaction afterwards? If the price action adhered to the Fibonacci retracements so well as described above, it’s no surprise that a Fib. level would work well for the reversal too. Just because the same people are probably involved with the move down as well as the move up when all these happened within mere hours.

So two lessons from last night.

1. I should pay more attention to the 161.8% level in my analysis along with the 50% level in the future.
2. and more importantly, don’t think the central bank (e.g. SNB) will not intervene just because everyone is milking them out.

EURCHF

EURCHF, 5 min.

An introduction to my Forex Trend Continuation Setup (FTC)

After many trials and errors with paper trading the forex market for a month, the first of my trading setups is finally taking shape. So I would like to document this approach here after a well executed trade this week (illustrated below).

This trading setup is based solely on technical analysis. Here’s an overview of the steps:

1. Define a long term time frame for identifying setup.
2. Draw the major supports and resistances.
3. Add a momentum technical indicator.
4. Add a trend indicator.
5. An entry is signaled by an agreement of the trend and the indicator at the support or resistance price level. Do not enter yet.
6. Define a short term time frame for timing, use this for the following steps.
7. Draw the supports and resistances on this short time frame.
8. Place an order when the price breaks the short-term trend to be aligned with the trend on the longer one.
9. Exit when the entry conditions are gone (not necessarily reversed).

This is very vague. So here’s a real example in practice.

Figure 1 shows steps 1 to 5 on the daily chart of CAD/JPY for a short entry. The entry point is the bar before the marked vertical line on Oct 21. See that CAD/JPY tested the descending resistance line (step #2) with a negative RSI divergence (#3). The trend as suggested by the moving averages is a choppy downtrend (#4). Thus, the conditions were met and a short entry is signaled.

CAD/JPY

For timing the entry, Figure 2 is a 3-hour chart of CAD/JPY with the entries and exits marked. Yellow triangles are entries and red dots are exits. I entered a full position after CAD/JPY made the initial dive and then retraced to the previous support (now resistance) line. It bounced right off that line strongly (left side of figure). I entered at market price once we made a hammer candlestick (negative signal) the bar before. Stop was placed at 88.0, near the recent high and at a round number resistance.

CAD/JPY, 3-hour

For the exit, I had a manually adjusted hard stop to be a couple of resistances away. I kept it loose on purpose because this position was my biggest winner. (Let your profits run). But once the RSI on the daily passed below 50, I took a more conservative approach on the exit stop. Then once CAD/JPY tested 84.50 and hung around 85.0, I tightened my stop and was taken out at 85.30. Note that my original target was 84.0, so I thought testing 84.50 was close enough.

Also note that this setup is expected to be executed recursively. It is meant to be run so that you’re stacking up your winning position if the conditions and the trend is in your favour. This is actually where the power with this setup kicks in. I’ll continue with the CAD/JPY example to illustrate this point.

Notice in Figure 2 that I added to this CAD/JPY short at the (second from the right) yellow triangle point on the chart at 86.3 for 50% more units. The down move was still intact as shown in Figure 1 at the time. Using the same setup, I added more units to this position. And by adding 50% more to my position, I was able to ride that last wave down for +200 pips on these extra units. Otherwise, I would have exited at 85.30 on the consolidation around 85.0 and left with nothing on the market for the last big wave.

The timing as shown in Figure 2 for this addition isn’t the same as for the original entry. But it’s obvious enough on the figure with the same markings which I used. Simply refer to Figure 2 for a visual explanation on the timing for this entry.

In case you haven’t noticed on Figure 2, but I just re-entered this position with half the size using the same setup. Since this third entry is still in progress, I can’t comment on it just yet. We’ll see how it goes.

Finally, for ease of referencing this trading setup later on, I will call this particular setup, FTC (forex trend-continuation). Right now it’s version 0.1, a first publication release but still in beta testing with my paper trading. Once the setup has proven itself, I will use it in live trading with real money. Then I will christen it with a version 1.0, and perhaps a better name. In the mean time, I expect more refinement to this setup as I continue to try it out on paper trading.

Check my FTC tag for more sample applications of this trading signal.

Update Nov 18, 2009: I’ve changed the name from FTCS to FTC as I now have a FTR setup.