Moving Averages & Candlesticks

As mentioned earlier, Entries are certainly not the key component to achieving success within the markets, and are not at the top of the priority list for a novice trader. Unfortunately, many novice traders spend too much time looking for that golden entry tool, strategy or indicator which they believe will allow them to make big profits. The fact of the matter is – managing your money correctly is what gives you the best chance to make profits. It helps you hold on to your profits so you can trade them on another day, week or year.

Entry signals vary between so many different methodologies, indicators, tools and strategies, that the right thing to do is to find a method that best fits your lifestyle; if you are a busy professional or have many distractions at home, it would be better for you not to have an entry signal that was based upon a 5 minute chart. You would more likely find a daily signal more appropriate, which means you would need to wait till the end of the day before you have all the data for that daily trading session. Only then can you make a decision based upon that day's data.

For traders who know and understand all the important components of a trading plan, entries do play a vital part, because when the entry is fine-tuned, traders can get into the market closer to turning points in the market and can ride a longer part of a trend.

When entries are fine-tuned, a trader can enter the market earlier. This can result in bigger profits, but als means that the risk can be reduced, since the stop loss can be set closer to the entry price, as illustrated by the example below:

Examining the image above, let’s assume there are two traders; Trader A & Trader B. Trader A has knowledge of candlesticks and knows that 8 out of 10 times a hammer candlestick appears in this particular market, it changes direction for at least a 500 pip movement. Trader A has a trading plan that allows him to enter as soon as the hammer candle is confirmed by a bullish candle following, and he does so early at the turning point in the market. Trader A therefore sets his stop loss at the turning point in the market, as he knows that should the market fall below this significant support level it is likely to continue falling further. This is where he places his stop loss as the worst case scenario exit point for his trade.

Trader B, on the other hand, has a trading plan that allows him to enter once the market has made 1 daily close above a 12 day Moving Average. As shown in the diagram, the entry for Trader B is much higher, so if he also uses the recent low of turning point in the market as to where he would place his entry stop loss, then his higher entry has expanded out the potential risk of the trade; to reduce this risk the trader needs to purchase a smaller position size.

Fine-tuning entries is more important to shorter term traders as they are in and out of short term volatile movements, whereas longer term investors would prefer to ensure that the new movement is actually a new trend and not just a temporary pullback in the market.
Trader B could always move their stop loss closer to their higher entry price to reduce the potential risk of the trade; however they may get too close to the market and increase the risk of getting stopped out due to the normal natural market noise.

The entries described above are only basic, as it is usually best to use a small group of entry signals together; entries that each have a high probability of success. This will increase the chance of the trade to be a successful one.

However, I also believe that “the more the merrier” does NOT always work when trading the financial markets. As you are now well aware, “simplicity is key”. This is because the more entry indicators you use, the higher the potential for human error to creep in. If the trading plan is complex the trader can often feel overwhelmed and confused.

Bar Chart Counter Trends

POSITION 1

In the image above you will notice that the market is clearly moving upward – it has three UP bars each with a higher high and a higher low.
Then the market pauses with 2 DOWN bars – they each have a lower high and a lower low than the previous bar.  
A trader could place their order just a few pips above the high of the 1st down bar, as a ‘Day Only Order’ which would only execute should the market move back into the main trend the very next day.
In this example, the following day the market moved down again, the order did not execute so the trader moves their entry to open a few pips above the high of the 2nd down bar, again as a ‘Day Only Order’.
This time the order successfully executes as the market rallies into the uptrend again, the trader is now ‘long’ in the market.

POSITION 2

You will notice that the bar at position 2 is an OUTSIDE bar (higher high with a lower low). An OUTSIDE bar is seen as half an up bar and half a down bar, and therefore constitutes as a valid counter trend, as it has moved against the trend by half a day (the upward movement, UP Bars, was for 8 days) so the time criteria and the price criteria are both valid.

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