Method Part 3 : Opening Trades - Entry Methods

There is quite a bit to discuss when it comes to kicking trades off.  Indeed, there are probably more books, blogs, twitters, spams, magazine pages and acres of newsprint written on this one subject than any other aspect of trading.  Personally I think the amount of time dedicated to entering trades is disproportionate and I hope to throw light on this over the following posts but, given that, to trade - one has to enter trades, I will add my own few hundred lines on the subject to the existing morass.

In 'Method part 2' I discussed what my short list of stocks looks like. Given that I have risk limits and portfolio size limits (you can just imagine more method posts coming can't you?) how do I pick which to buy on any given day?

I think I mentioned that, as the list comprises a bunch of rising stocks, I could just toss a coin, throw a dice or use a random number generator to select one and buy it. I don't believe that any entry method offers superior returns, I don't believe that money is made on the entry at all, but, I also don't toss a coin etc. to choose stocks. Why not? Well simply because I am human I suppose, and, this means that my entry method has to match my personal beliefs about when is a good time to buy.

So rather than go into the nut's and bolt's of my entry method I will look at a few different styles and what I think each may deliver. I will start this discussion by stressing that the entry alone means nothing! I never make a trade without knowing what will cause me to close it. I cannot stress enough that I believe it is the method of closing trades that makes the money.

Now that I have become all excited with bold underlined text - lets get into it

I will start with a chart of MFG, This stock was in a fabulous up trend for a considerable period and this chart shows theoretical entries using my current method. Alas I didn't actually take these entries – I marked this chart up while I was digging around creating the method, I wasn't chucking money into it at this stage but it was almost the ideal stock for a while and I love this chart because it shows what can happen when things are going well.

Chart courtesy of www.IncredibleCharts.com

 The first alternative entry method is using an inside candle (A candle where the high and low are contained within yesterdays high and low). You can find this method all over the internet but basically it consists of finding a trending stock and buying the break above the inside candle. All I have done here is used a group of moving averages to determine that a trend exists and close below an average true range trailing stop as an exit. Lovely isn't it? Bear in mind it's hard to lose money when a stock trends like this

Chart courtesy of www.IncredibleCharts.com

   To be continued...