Transcript:

'Successful Trading' - Episode 4: Entry Conditions

Presented by Jeff Bryant, HomeTrader.

Hello - and welcome to Episode 4 in our series on Successful Trading.

Previously, we’ve looked at the differences between Trading and Investing, Why We Need A Trading Plan – and the Elements of a Trading Plan. If you haven’t seen these, I think it’s worth going through to the archives and having a look, as they do cover some quite important concepts.

In this episode, we’ll be looking at Entry Conditions. Consider this IPL trade. Entry early in September 07 at $3.10; exit mid-2008 some 9 months later at 7.60 – a profit of nearly 150%. This is obviously one of the big ones – but how did it start?

Your trading plan will have a set of entry conditions – criteria the stock needs to meet before you go spending your hard-earned money. We view these in 2 parts: Gates and Triggers. The best way to explain these is by example.

First, let’s look at Gates. These are rules that as much as anything, define where we don’t want to buy - so that what we are left with will improve our probability of success. You could have a rule that says you don’t want to trade anything with a value of less than, say, 50 cents; because you feel that anything under that level might put you in the realm of the “penny dreadfuls” as they are known.

You might also have a rule based on Trend. Generally speaking, we want to be going with the flow of the market - trading with the strength.  To emphasise this, consider the reverse. We’ve looked at this chart before, but it doesn’t hurt to remind ourselves of what we don’t want to get caught with. One look at this and you know you do NOT want to own it – it’s glaringly obvious. And the best way to not own it is to avoid it in the first place! Having a Trend Gate will help you make sure you don’t get involved in stocks like this.

You might also have another rule that makes sure there is enough Liquidity in the stocks you choose. Liquidity, or turnover, is the average amount of money being thrown at the stock – this effectively reflects the amount of interest in it, so that when the time comes for you to exit, there will be a much greater likelihood of a buyer at the other end.
    
Of course there are other Gates or indicators you can choose to use as part of your entry conditions – but we don’t have time to go through all of them here.

The second part of your entry conditions will be what we call the Trigger. Whereas a Gate can be open almost indefinitely, a Trigger is a point-in-time-occurrence. Again, let me give you an example. As we’ve mentioned before, price does not move in a straight line. It goes up - and it goes down.

Each time we get that downward move – as the stock takes a breather, a peak is formed. When the stock is trending, it will regain momentum, and move past the peak and up into new territory. We call this closing above the previous peak. It’s a condition that can be seen in any and every good trend you are ever going to look at.

So naturally when we see this condition in the market, our interest is ... triggered!

The trigger, being a point in time, is the Call to Action. With a stock passing through all your gates, when it triggers - you want to own it. You don’t just pop it into a watch list and keep an eye on it – trading isn’t a spectator sport – you need to act.  Our trigger tells us WHEN.

There are various triggers for differing  trading styles and timeframes, but regardless of which you choose, you’ll be back-testing  your system, before you trade it. You’ll know you have the right entry rules before you start moving your money into the market.  
    
This helps you avoid making emotional, subjective decisions when you trade. It is your ability to do this that will set you aside from the rest of the market - and increase your probability of success.

If you’d like further information, Just visit our web site at hometrader.com.au, and book in to one of our free Information seminars.