Finding an Entry Point in Forex Trading

Finding the best entry point is a topic that has fascinated traders for decades. Everybody wants that best possible entry point which allows the trade position to pick up right from where the move takes off, so as to garner all the pips that can be taken from the trade. However, no trader is a magician and therefore it is impossible to accurately predict the point at which a major market move will take off. The best that can done is to get an entry that sacrifices some part of this move to the market, hoping that there is still enough left in the rest of the move that can be captured for some good gains. This is the focus of all strategies that are aimed at finding the best entry point.

Over here at Investoo, we would like to add some flesh to the bones and contribute our ideas as to what we think would be the best ways to find an entry point for a forex trade.

What are the Basic Considerations for Finding an Entry Point?

We have already identified a basic consideration that traders looking for the right entry point must take into account: it is impossible to pick a move right from where it starts. This occurs very rarely and is mostly a function of chance rather than any calculated work on the part of the trader.

Another consideration that the trader must put into his idea bank is the fact that it is not all the time that a market move must be followed. Sometimes, if a move which was missed has gone too far ahead, it may be best to leave it alone and look for some other opportunity. Not taking a forex trade in these circumstances is just as good as taking a profitable one. You still have your armory complete and you can do wonders with your saved capital on other trades.

Account size: Once the trader understands these basics, other factors can then be considered. Top on the list is a consideration of the account size. This is very important for the following reason. Once a major move has started to take place in the market, a point of support or resistance can be identified from the charts showing the price action. Usually it is a good practice to set the stop loss for such a trade below a key area of support or above a key area of resistance. This allows the key area to reject any attempt by the price action to retreat beyond those points, thus saving the stop loss from being triggered and preventing a trade loss.

Once a decision has been made to make a trade entry, the distance from the entry point to the stop loss area automatically becomes the risk to the trade. The trader must then ask himself or herself: if this trade gets all the way down to the stop loss, how would such an event affect the account capital? This question becomes even more pertinent when we consider that in the event that a slippage occurs, stops may not be enough to curtail losses as the sudden large drop in price will burst through stops. Do not be deceived into thinking this is a rare event: it is not rare at all and slippages can occur following weekend gaps. If this occurs, will the account size stand up to such an event? How about if it occurs several times? If the account size is healthy, it may be able to withstand a drawdown. If not, then a wrongly placed entry can constitute an albatross.

Risk-Reward Ratio: The trader must then analyze the chart to see if the expected move will be at least 2 times this risk factor. If the entry point has been well timed, there will be enough room for the trade to achieve the proper risk-reward targets. The minimum a trader should aim for in terms of risk-reward ratios is 1:2. In other words, risking one pip for a gain of 2 pips should be the least a trader should aim for. If the entry point is such that this minimum risk-reward is unachievable, then such an entry is not a good one.

How to Place Entry Points Correctly

The best entries are seen as follows:

a)    For a long trade, just above a strong support area. This allows the placement of a stop loss below support, so that a retreat in prices will be rejected at the support level, protecting the stop loss. It also allows the stop loss to be placed tighter, leaving little on the table and allowing the trade to pursue aggressive reward targets relative to the risk.

b)    For a short trade, just below the resistance area. This allows the placement of a stop above the resistance, so that upward retracement of prices in a short trade can be halted at the resistance, protecting the stop loss.

These support-resistance scenarios abound in the market:

a)    It can be in the area of pivot point trades, where any of the pivot points can serve as support or resistance, depending on where the trade is coming from. We see an instance of this below:
finding entry

Here we can see price take off downwards from the first resistance pivot (R1) all the way down to the first support pivot (S1). If you watch the preceding price action, you will see that R1 served as a strong resistance and protected the stop loss area.

b)    It can also be in the area of normal support and resistance areas depicted by highs and lows of price action.

c)     Even Fibonacci retracement areas can serve as support or resistance if the trader has active trades based on Fibonacci retracement levels ongoing.

Whatever you do or however you play the market, always make sure your long entry points are close to the support, and the short entry areas close to the resistance. This way, you give up little to the market, save your stops and get great risk-reward ratios for your trades.

 

Adam

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Adam is an experienced financial trader who writes about Forex trading, binary options, technical analysis and more.

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