How To Properly Enter A Trade In Forex
Almost every trader asks, what is the best trade entry? Since you are here reading this article, I suppose that you are asking that question too right now and wanting to know the answer. I’ll give you that answer(s) in this article, but you have to promise one thing; Donate a $10 to my PayPal account… wait wait wait!! I am just kidding. Promise that you’ll follow these steps, they will save your account from getting blown away.
Why a good trade entry is significant for your trading?
A good entry will give you a much better Risk to Reward Ratio (RR). Many new traders make the mistake of chasing the price, entering a trade based on a sudden market movement. How many times did you find yourself in a trade based on an immediate breakout along with a large candle? Well, I can remember a few of those entries my self. I use to be sitting in front of my desktop, watching the market, suddenly a break out happens, and as fast as a space rocket, my fingers hit the mouse, and I click the buy button.
Seeing that candle moving in my direction makes me feel like the king of the market. The moment deserves a beer, and sure it does, look at that profit at the bottom right corner of my trading platform. I leave my Royal chair and run to the fridge, pop up a beer, and back at the screens with a broader smile than Julia Roberts’. After a first glance at the chart, What I see is that the big lovely green candle is now a substantial red candle with a wick taller than a giraffe neck.
Paralyzed of the situation, I am sitting there, praying for the gods to make the market reverse back. It seems like they are busy saving some other traders, not having time for me at the moment. So at this point, the damage is significant. The pain is enormous, time to close the trade. I hit that button, and there we go, another loss added to the list. Man, looking back at that trade, I could have the best price ever if I took the opposite side of it.
Be a smart shopper when entering a trade
We are so damn good at gathering coupons, credit card points, joining consumer clubs, and so on. We wait for Black Friday or Cyber Monday the whole year to buy a smart TV. However, as a new trader, you can’t wait for an hour to enter a trade at a good value. You open your trading platform with one thing in your mind, and that is to get involved in trades. To be in the market, makes you feel that you’re doing something.
We, humans, love to create stuff, do things, and feel that we are in charge. So being involved in the market makes you think that you are doing what you supposed to do, trading! I mean, you are a trader after all, isn’t that what traders do?
The answer to that question is yes, a trader does get involved in trades, and being in the market is a big part of the game. But trading is so much more than entering trades. If you would ask a professional trader about their trading routine, you’ll find out that opening trades makes only 1% of what they do.
A trader’s routine is all about planning trades, waiting for the price to reach their pre-planned level. Then more waiting for the trigger signal, to then maybe enter a trade, depends if their rules got met or not. That is how a smart shopper would act in the market.
So why not approach the market the same way as your day to day shopping? By doing so, you’ll be trading like a seasoned trader. It won’t be easy at the beginning, but trust me, you’ll get there with the right mindset. It’s a pretty simple approach. All you have to do is, wait for the price to come to you.
Different types of trade entries
There are many kinds of trade entries and strategies. I will cover the most common ones here. I’ll be using some charts to show you the examples, some of them are cherry-picked yes. They have to be so, that way I can make my point and give you as many good examples as possible.
Entry on pullbacks
Pullbacks entries are the bread and butter of my trading, and that is 90% the method I use and teach in the PA-FX Trading Course. A whole session is dedicated to planning trades entry, stop-loss, and target placement. While here in this article, I will cover the most basic entry strategies.
Let’s consider the chart below; it’s the 1H chart for NZDUSD. Last week, the market was waiting and expecting a rate cut on NZDUSD. In fact, 85% of that rate cut was already priced in. The RBNZ shocked the market with no cut, and NZDUSD shoots up like a rocket. It’s the hourly chart, but the move happened in a matter of seconds. At the time, you would think this market will keep moving up forever. You see that tall candle and can’t resist hitting the buy button, blinded by that fast move, you start planning what to do with the profit. Let’s be honest, when was the last time you saw the market moving in one direction only? Never, so why chase it?
Let the move happen and look at how you can get involved later when the dust settles, and the price is back at value. The price will always move back to fair value. The smart money will never buy at that high level, and the price will start pulling back to find buyers again. No matter what market you trading, that is always the case. So, forget the buy and sell buttons for now. Go ahead, start planning It, and drawing where you expect the market to pull back to.
Trade Entry Planning
So, let take you to the next level, planning a trade like a professional trader. As mentioned above, the move happened due to the RBNZ surprising the market with no cut. It’s an essential fundamental change, as a trader, you should consider a continuation move in the same direction of the prevailing move up. The “why” is done here, and that box is checked on your trading checklist. So, what about the how? Let’s dig in the next chart to give you one way to plan such a trade scenario.
The first thing I do in such a scenario is to look for the most significant (swing high In this case). Looking left, you can see a clear swing high where we can see the Head and Shoulders Pattern at point A. That’s always the first level I am watching for the pullback. As you may see, I also drew a Fibonacci Retracement (Fib), adding some confluence to the idea. There are even more confluences that we can use to be more confident in the trade. For this article, we will only use the Fibonacci retracement tool. So, the previously broken significant swing high is now marked as well as the Fibonacci retracement. The area between 50% and 61,8% Fib is marked as the kill zone. In this area, we want to see our trigger happening.
Depends on your trading strategy, it could be that you are waiting for a pin bar, bullish engulfing candle, or chart pattern to happen in the Kill Zone to confirm that bulls are ready to start a push higher from this area. (Watch this video series, to learn more about Candlestick And Chart Patterns)
So, what now? Do you sit there, waiting for the market to move to your level of interest? No, now, you add that chart to your watchlist. What I also do is putting an alert just above the kill zone to get notified when the price reaches my levels of interest. That way, I do not need to keep checking the charts. That way, I will not make impulsive decisions either.
Trade Entry Triggers
So, let’s say you got notified by the alert that the price reached your pre-planned level. It’s now time for you to make a decision based on your set of rules. If you don’t have rules, you should not trade a live account yet. One of my entry rules is that I want to see at least one Candlestick Pattern inside my kill zone. Another rule for the conservative trader could be a confirmation candle, in this case, the candle that closed above the Morning Star candle. That’s it, the rules for this trade entry strategy are met.
At this point, no need for more analysis. The more you will analyze things, the hard the decision will be, and you’ll get paralyzed and confused. Another way for entring such a trade would be by using a buy limit order in or at the top of the kill zone. Using limit orders have a higher failure risk, and you could miss out on some trades. For the more aggressive trader, it works just fine. While for the conservative trader, it’s a better idea to wait on the confirmation, as you have in the chart below.
Now, is the time to plan the exit for both target and SL placement. For that, there are also many strategies, and I teach many of them for different trade scenarios.
Placing Target and Stop-loss
For the entry, you enter on the next candle open. Stop-loss, in this case, has to be set below the low of the morning star candle (Also known as Pin Bar or Hammer). Give the stop-loss some buffer below the wick, do not put it too close. Even here every trader should have a set of rules, how many pips below the previous low should the stop-loss be. The easiest way is to use the ATR indicator, (Investopedia ATR Definition) my recommendation is to have at least 1 ATR below the low of the candle.
For targets, two take profit levels, with the first target at least a 1:1 risk to reward, or at first significant swing high looking left at the previous structure. Target two is set at the highest top of the whole swing. Now, if you want to ride the possible new bullish trend, what you could do is to trail your stop-loss below the higher swing lows that happen on the way up.
What To Do If Missed The Trade Entry
Let’s say somehow you missed the trade, what should you do? Well, the same as explained above should be repeated. Let it run and back to the drawing table to try and find the next possible entry-level. As you see in the chart below, the market did not reach the target at the first leg up. It did a pullback almost back to the entry, to then start moving up again and reached the primary objective. Even at this point, the market was kind enough to give you yet another pullback. A new chance to enter once a long trade. The last significant drop before the strong bullish move gave a strong signal for a long trade, after printing a bullish engulfing candle (Reversal Candlestick Pattern).
What did you learn from this so far? I hope your answer is in line with “No need to rush, have patience, and wait for the price to comes to you.” If that is what you think you learned so far, then great, I’ve done an excellent job, and you should let me know that in the comment section below.
Trade Entry Failure
Failure? Yes, you will have trades that will go against you. No matter what you do and how good a trader you are. As you see below, the same analysis and preparations as above. The trend was a beautiful, strong bearish trend. We drew our level of interest the same as before, at the broken swing low. We had the Fibonacci retracement as a confluence area. Still, the market made a move up instead and stopped the trade. Honestly, in trading, there’s no way to avoid losses altogether. All you can do is, following your trading plan and rules. Being disciplined is the most significant one thing that will help you to stay in this game as long as possible.
This trade below is a good trade that went bad. That’s all it is, no need to change your strategy or to get paralyzed by it. The costs of doing business in trading are the spread/commission and the money you risk at the losing trades.
The Market Is Very Kind Indeed
Persistence is another crucial component both in trading and many things in life. So, you had a losing trade, but you followed the plan and the rules. At this point, many traders will start having issues entering another trade that’s based on the same strategy. Don’t be that trader. As soon as you get another signal, you should go for it. Basically, if we continue looking at the same chart and even though you had a losing trade. The structure of the market is still the same. There is no major high that got broken. So that means the prevailing bearish trend is still valid, and you should keep looking for shorting opportunities.
Let’s observe the continuation of that chart. So no major high break = Bearish trend is still valid. Having that in mind, you do the same routine once again, noticing that all the rules are met and boxes are checked. Entry after the bearish engulfing candle close, SL above the engulfing candle, target next significant swing low, and at least 1:1 RR. This time the target is reached. You are happy again and feel like the king of the market instead of paralyzed and confused.
Trade Entry On Breakout
I can’t believe that I am writing about this entry method. What can I do, I promised to show you some of the methods, even though I am not a fan of Breakout entries. However, there is an excellent way to enter after a breakout taught in my course.
The most common breakout entry method is placing a BUY/SELL stop order above/below a resistance/support level. The main reason I don’t like this entry strategy is the number of fake-outs that happens all the time. The dealer knows there are stop orders at a certain level and that’s easy, a good liquidity pool to trigger. I’ll show you an example of what I am talking about in the chart below.
I think everyone could refer to a scenario like the one below. A break out entry gets triggered as soon as the price reaches the buy stop order. The trade looking good for one hourly candle, then the market makes a pullback to the entry and beyond. The praying starts again for the market to reverse, it reverses, twice, to then boom Stop-Loss hit and Game Over. Now don’t get me wrong there are times when this works just fine. I wanted to start with a failed trade since I’ve tested this method many times and didn’t have a good winning rate using a breakout entry like this.
Here you have a winning example. Price reached the target, a trade to show on social media and send to friends showing them how good you are. But this is still in hindsight, everything looks easy this way. What is missing here is the time factor and how long you had to wait on the trade to reach that target. You see after this trade got triggered, it took the price 23 hours to reach your target. Now, if you have exceptional discipline, then no issue you’ll wait out the price to reach your target. So what about being in the market for that long time for that amount of pips? Is it worth it? The longer you are in a trade, the higher is the risk of a bad headline hitting the wires changing the market sentiment and take you out of the trade.
Even in this example, you can see how kind is the market. The price did a pullback, offering every trader the chance to join the bears’ party. And you had a trigger in form of the bearish engulfing candle as well. In any case, it’s up to each to trade the way that fits their personality. For me, it will always be the entry on the retest/pullback.
- Have always your plan ready.
- Never chase a sudden move in the price.
- Be a smart shopper in the market and wait for the price to come to you.
- Pullback entries have a higher winning rate.
- Breakout entry on stop orders has a higher failure risk.
- For an even higher winning rate wait for confirmation candles.
- Do not enter a trade that has a lower than 1:1 RR.
If you had issues with entries before, I hope that you gathered some more knowledge about the topic. Although this article has been pretty long, I still was only able to skim the surface of the topic. If you are at the very beginning of your trading career, there’s so much material out there for free. You should not buy any course at this stage, I did an article about the Best Way To Learn Forex Trading. It’s a great article to help you out to start right.
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Images made with TradingView