In today’s episode, you’ll discover the 5 essential things I look for before entering a trade (you don’t want to miss this).
So tune in right now…
Hey, hey, what’s up my friend?
In today’s episode, I want to talk about the five things that I look for before I place a trade.
I know trading can be daunting especially those who are new to this business and you might wonder, “Is this the time to enter a trade? When should I buy? When should I sell? Am I too late to the party? Am I too early? Do I need to wait for more confirmation?”
These five things will help you navigate the markets and make you feel more confident before putting on a trade.
Let’s get started.
1. Identify the market structure
So I’ll ask myself if the current market structure is in an uptrend, downtrend or a range.
Once I’ve defined the current market structure, I’ll know what to do.
If the market is:
- In an uptrend, I’ll look to either buy the dips or buy the breakouts
- In a downtrend, I’ll look to sell the rallies or sell the breakdowns
- In a range, I’ll look to sell at resistance or look to buy at support
Once you have defined the market structure, then you’ll know if you should be buying or selling.
2. Identify the area of value
For example, the market can be in an uptrend, but the price might be in no man’s land. Or a breakout to all-time highs had just occurred and the price now is in uncharted territory.
At this point, I don’t want to be buying because the price is not at an area of value.
How do you define an area of value? Well, there are a few ways to do it:
- If the market is in an uptrend, you can wait for it to retest the previous resistance turned support
- Or a specific moving average that the market respects like the 50-day moving average
- Or you could wait for it to retest the upward trendline, etc
The area of value would vary depending on market conditions like whether the trend is strong, healthy or weak.
So I’ll see where the price is relative to the area of value:
- If the price is far away from an area of value, I won’t take the trade
- If the price is near an area of value, then I want to be trading from there
3. Identify the entry trigger
You’ll look for the setup or the pattern that will get you into a trade.
So the market could be in an uptrend, then it comes into an area of value like an area of previous resistance turned support. And now I’m waiting for an entry trigger to confirm my hypothesis, to confirm that the buyers are about to step in to push the price higher.
For entry triggers, there are many variations you can look for. It can be something as simple as candlestick patterns, like a bullish hammer, bullish engulfing pattern.
You could look for an RSI crossing above 30. You could go down to a lower time frame and look for a break of structure, looking for the price to make a series of higher highs and higher lows.
Now, once I have a valid entry trigger, the next thing I’ll do is to plan my exits.
4. Plan to exit when you’re wrong
Your exits can be broken down into two parts – the exit when you’re wrong and the exit if you’re right
So let me explain.
Your exit when you’re wrong (stop loss)
This exit is otherwise known as your stop loss.
My principle is that I want to place my stop loss at a level where if the price reaches it, my trading setup gets invalidated. What does it mean?
Let’s say I’m looking to buy at an area of support in an uptrend. My stop loss got to be below that area of support. Because if the price were to break below that area of support and hit my stop loss, it is telling me that that area of support no longer holds.
It doesn’t matter what trading setup you’re using. You could be trading breakouts, you could be reversal trading or whatsoever. The concept applies the same. Your stop loss must be at a level where if the price reaches it, it invalidates your trading setup.
Let me give you another example.
Let’s say you trade a head and shoulders pattern. At what price point will the head and shoulders pattern be invalidated? It would make sense that your stop loss is above the head.
Because if the price breaks below the neckline but it reverses up higher and takes out the highs of the head, then clearly the head and shoulders pattern won’t look like a head and shoulders pattern anymore. It’ll look like a weird up and down pattern.
This is what I mean by having your stop loss at a level that invalidates your trading setup.
5. Plan to exit when you’re right
So once you’ve defined that stop loss where you’ll the exit when you’re wrong, then the next question is, where do you exit if the market goes in your favour?
Your exit you’re right (trailing stop loss)
And this brings me to the first part that I touched upon earlier – the market structure. I like to exit my trade based on the market structure I’m seeing.
Let me give you an example.
If I see the market where the price has been above the 20-day moving average for quite a long period and is still above it, this tells me that the trend is strong.
Let’s say I got in at a good entry price in this type of market condition. I want to trail my stop loss because I have no idea how, how far this trend could go. It could continue going for the next few days or weeks.
For such market conditions like in a strong trending market, I want to trail my stop loss and ride the trend.
Your exit you’re right (take profit)
And sometimes you might not be trading trends, you might be trading a range market where the market is contained between the highs and the lows.
If I let’s say I happen to buy at support. Then in this case, I want to sell my position just before resistance, because I know that there will be potential selling pressure lurking at resistance.
Since the market is in a range, I want to capture a swing in the market. I don’t want to look to capture a trend because the odds are not quite with me, because I have to expect the resistance to break for the market to trend higher.
The odds are pretty slim, so I’d rather just capture a swing at the highs and exit the trade.
Sometimes you might anticipate the highs of the range to breakout and the price might trend higher. If that’s the case, then you can exit a certain amount of your position at the highs of the range and then ride the remaining half to see if you can capture a trend.
That’s another way you can go about it if you have some kind of a hunch or a higher timeframe analysis that tells you that the range is about to breakout.
In essence, the things I look for before I enter a trade is very simple:
- Market structure
- Area of value number
- Entry trigger number four
- Exits when you’re right
- and exits when you’re wrong
This is what I call the M.A.E.E. formula.
With that said, I hope you got some value out of it. I wish you good luck and good trading. I’ll talk to you soon.