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Entering the Market
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A new position opening technique is the second most important element of preliminary trade planning. The rules of an opening of a new position and entering the market are numerous and require very precise adherence. Because we are discussing intraday trading, the choice of an entry point represents an especially important and difficult task because of the limited time—one day—and limited space—the average daily range of any given exchange rate. First, we should always remember and consider the fact that, during an intraday trade, all trading activity reflects only a market noise. In other words, the result of any single trade is greatly influenced by the casual movements of the market and its chaotic fluctuations of significant amplitude, viewed against an average daily range. Therefore, the tactics that can and should be applied to intra­day trading can be characterized as the hit-and-run technique.

HOW TO CHOOSE AN ENTRY POINT ____________________

The choice of an entry point should be based on technical signals that are submitted by the market when it comes close to a critical level defined by a trader in advance. According to this rule, a new position opening point should be at the closest possible distance from the technical level that you should define as critical at the present moment.

A certain line drawn on the chart (whether a support or resistance, trendline, or border of some formation) should be considered as the critical level. In some cases, a narrow price range can also be defined as a critical

zone; above it, the market submits a buy signal and below it a sell signal. A long position should be opened ahead of a support, and a short position should be opened ahead of a resistance. See Figure 14.1. When done so, the stops should be placed on the opposite side of the line, dividing the market space into two different parts. (Below the line, a short position is preferable; and above the line, go long.)

A new position open price should be at the closest possible distance from the technical level you consider as critical at the present moment.

ENTRY TIMING RULES

There are three rules I follow about when to enter the market:

1. There should be some period of time between the moment of making a decision about opening a new position, and actual transaction execution. This period of time gives a trader an opportunity to reconsider his decision and to abort it if necessary. It also prevents him from making im­properly justified and impulsive decisions.

Such an approach guarantees you against making impulsive and insufficient decisions. It will save you a lot of worry and money. The duration of this period can fluctuate from several minutes to several hours. As was already indicated earlier, no transaction can be executed before the levels and conditions of protective stops for a new position are determined. The duration of this period will also give you an opportunity to again reconsider your trading plan and, if necessary, to introduce additional corrective amendments into it. In some cases, such a period of ex­pectation can result in radical changes to the initial plan, and even in its complete rejection.

Often, the same price level gives an opportunity for opening positions in opposite directions within the same trading day. Such conditions often come after the market completely fulfills one trading signal and creates an oppor­tunity for entering the market in the opposite direction. See Figure 14.2.

2. Generally speaking, any position (if open in the direction of the current market's movement) will give a trader an appreciable statistical advantage in the prevalence of profitable trades over unprofitable ones. This advantage amplifies if such a position opens at the moment of highest market activity and greatest speed of the move.

Profit taking

FIGURE 14.2 The market provides an opportunity to make a profitable short trade before going long on the break of the resistance.

Such a trading tactic is the most conservative and safest one. Even if it seems that such an approach lowers the average size of the potential profit, it gives a statistical advantage—the prevalence of profitable trades over unprofitable ones. This tactic can also be considered the least stress­ful because, in most cases, some profit will be generated almost immediately after opening a position.

I open the overwhelming majority (75 to 80 percent) of new positions in the direction of the current movement of the market. The statistics of profitable and unprofitable trades show that the majority of profitable trades are accomplished by opening a position in the direction of the current market movement. I am absolutely sure that if you follow the rule of opening new positions only in the market but not against it, the statistical prevalence of profitable trades over unprofitable ones could be overwhelming.

Planning most trades in advance provides some additional comfort to a trader. In this case, positions can automatically be taken in accordance with the preliminary designed plan at the desired price levels. There will be no need to monitor the market constantly, and, most of the time, I use a limit or an entry stop order for opening the initial position. I do this even if I'm not going anywhere and am only watching the market. There are sev­eral advantages to such a trading technique:

•  First of all, I'm saving my time, and if the position according to my
plan is taken using a limit order, then I can place a protective stop si
multaneously. After that (if no reverse was planned), I have nothing to
worry about and there is no need to watch the price action at all.

•  In case the position is taken through an entry stop order, then all I
need to do is set an alarm. When the computer gives me a signal that
the order is executed, then I place protective stops and once again
have nothing to worry about and can spend my time doing something
else besides watching the market.

•  Automatic position entry also saves worry. It gives me a feeling that
I'm in control of the situation at any moment. I feel myself in charge of
the trading process, because I chose the price at which to enter and
exit the market, as well as price at which to give up if things turned
bad for me. If, for some reason, the market didn't reach my projected
price level, I consider it as the market's own problem, and there was
no good trading signal or price to enter it.

•  Automatic order execution also allows me to enter and exit the mar­
ket at the exact price I planned from the very beginning, and not to re­
consider my previous trading plan too often. In case the position
opens through an entry stop order, I'm not missing the move if the
market is moving too fast.

•  Such a technique also supports my money management requirements
and allows me to calculate my potential losses in advance.

I open up to 85 to 90 percent of my positions using this technique, and the overwhelming majority of them are in the direction of the current movement of the market.

3. If, in accordance to a trading plan, the position should be opened
in the direction opposite to the most current movement of the market, it
would be better to do it during the least market activity and its slowest
movement.

Many traders have failed and were compelled to leave business forever because their basic tactics for a trade were mostly based on attempts to catch the moments of the market reverse. It is incredibly difficult to catch the exact moment of change in the trend or the market direction, es­pecially when trading short-term contracts. In longer-term trading, this issue looks a bit easier and can be successfully performed in some cases. Using the common sense trading technique often allows me to catch the price close to extreme with a relatively high degree of success, but it also works well in case my interest at the moment is not higher profit but rather the safest way to make some profit.

Because the trend has high momentum and inertia, the reverse process usually takes a significant period of time. Therefore, it is possible to open positions in the direction opposite to the direction of a previous or current market's movement only when the market calms down a bit and shows signs of inability of further movement in the initial direction. The speed of its movement should be considerably reduced, and the market should be moving sideways before it gives a chance to open a new position. If the market stops moving during some period of time and does not form new local extremes, you can think of opening a new position in the opposite direction. The details will be described in the templates of this book.

4. The most effective trading tactic can be considered the one that as
sumes a new position opening only in the most probable direction of move­
ment of a day. A good trading plan should never be based on possible
retracement of the main move. It's also dangerous to open a new position
against the main direction of a day movement, if the market has already de­
termined this direction. The less time remaining until the end of a trading
day (24 hours), the less is the probability that the market will suddenly
change the direction of the main intraday movement to the opposite.

This recommendation also follows directly from the philosophical concept of the method. First of all, the market is not a sewing machine in which the needle runs up and down with identical amplitude and speed.

Usually, if the market is active enough, it has a highly visible intraday ba­sic direction.

Statistically, before a reversal, there should be a certain period of market hesitation that a trader can use either for liquidation of the prof­itable position or for planning to open a new position in the opposite direction. However, all this can be correct and will work only when the market has not yet chosen the direction of the main intraday trend, and has not finished formation of a daily trading range. The market also requires some time to reverse and to begin its movement toward the opposite side of the previously established range—especially if there is not much time left before the end of the day and the average amplitude hasn't been seen yet. Therefore, at the opening of new intraday short-term positions, I consider the following rules 5 and 6 useful:

5. Do not open new positions on the European currencies against
USD at the beginning of a trading day or during the Asian trading session.

This rule is also connected to the fact that, more often than not, the increase in activity of European exchange rates begins only after the opening of the European trading session. During the Asian session, the rates of European currencies against USD and other non-Asian currencies trade passively, most of the time in a narrow range that demonstrates classical behavior of the market in a narrow side trend. There are rare exceptions to this rule, such as when I consider making a safe short (20 to 40 pips) trade with tight stops and to liquidate the position prior to the beginning of the European session. This situation does not happen very often, and I try to not make many of these trades. From the time when I was an absolutely green novice and traded without stops, I remembered well that the longest lasting positions were targeted for a fast profit. Therefore, I don't recommend such trades to my students (especially beginners), and I don't plan to describe this technology in this book.

The other kind of exception occurs in cases when, during the Asian session, the rate of the European currency reaches some critical level, the definition of which is possible by analyzing the longer-term charts like daily, weekly or monthly. In these cases, it is necessary to react to the sig­nal received, even if such situations happen very rarely.

6. I do not open new positions against the major market move of the
day after the beginning of the New York trading session, and especially af
ter ending of the European session.

It is not so difficult to determine where the main movement of a day has been directed. In most cases, it could be clearly seen on the charts by the closing time of the European session. It is characterized by a highly visible intraday trend and also by expansion of the intraday range, which has occurred during the entire previous period of time from the beginning of a current trading day.

The only case in which you can accept some risk and open a new position against the main movement of a day during the New York session is as follows:

•  The market has reached one of the main technical levels such as a ma­
jor support or a major resistance. This level should have more than lo­
cal intraday significance, but it has to be easily determined on daily
charts as a minimum.

•  The daily range has already exceeded its average typical range for the
particular currency by the time the major technical level was
achieved.

•  The main move of the day was formed as a result of an impulsive mar­
ket reaction to someone's comment or market news.

When these conditions are met, there is a possibility for a counter­trade with stops placed outside the most current extreme, major support, or resistance zone. However, the probability of making a profitable trade in such a situation does not usually exceed 50 percent.

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