Trading System Elements: Entries

The development of a trading strategy is an iterative process, but the start of the process is always the entry idea. If you are trading an asset class, or even a single instrument like a stock index, you need to have some idea how that class or instrument trades, and then test your ideas on how to enter the market at the appropriate time. The entry idea might be as simple as “I’ll trend-follow by going long after two up closes, or short after two down closes,” or as complex as “I’ll wait until I have a one-third retracement in the third wave of an Elliott wave cycle and incrementally buy in a position at any further Fibonacci retracement level.” For many, the entry idea comes from the study of charts; recurring up or down moves seem to happen after a certain chart setup. Some entry ideas are stimulated by the technical analysis literature. For others, like me, test ideas just pop up when I’m grocery shopping or mowing the lawn. However you do it, if you find a good entry idea, the rest of the development process is pretty straightforward.

This chapter is the first of three that will detail the process of building a strategy. Chapter 5 explores trade exits, and Chapter 6 looks at trading filters that are used, primarily in conjunction with the entry, to screen in good trading setups or screen out bad setups. Through these three chapters, we will build a stock and commodity strategy to illustrate the process. There will be other examples ...

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