Entry point in forex. How to open trades correctly

Entry point: what do over 70% of traders forget about

29-10-2020

Previously, we dealt with the rules on how to enter the market (read here). Today we’re going to keep learning how to open deals in financial markets correctly, so let’s talk about the entry point.

The right entry point is seen as one of the key factors for profitable forex trading. Any trader’s task, both a beginner and a professional, is to set up a clear system to determine the point of opening a position. In this article, let’s find out how to do this and prevent fatal mistakes.

Contents:

1. What Is Entry Point Confirmation
2. What is confirmation of the entry point
3. How to Find the Right Entry Point in the Forex Market
4. Traders’ Major Mistakes When Finding the Entry Point

5. How to Find the Forex Entry Point: Three Strategies to Try Out

What Is Entry Point Confirmation

The entry point is about certain market conditions under which you can open a profitable deal. After analyzing the market, the trader understands the following thing: there is a high probability that the price will go in a given direction at its current position, which means that you can open a buy or sell deal.

What determines the entry points to the forex market? The answer is your trading strategy rules. This is perhaps the only correct answer.

Entry point in forex: Market entry rules

Here are the key features of any good entry point:

  • Clear signal (bounce, MA crossover, candlestick pattern, etc.)
  • Highly probable price movement in a certain direction (rise or fall)
  • The risk/reward ratio is at least 1:2 or higher, which is better
  • Additional confirmations

What is confirmation of the entry point

Most trading strategies use several types of market analysis. As a rule, we have the main one, e.g., a technical analysis, and those that are used to monitor additional signals. Additional signals enable you to filter out false market entries and also increase the likelihood of opting for the right position.

For instance, if you trade based on support and resistance levels, the entry point will be formed by breaking one of the contour lines or bouncing off it. In this case, you should wait for some breakout or bounce confirmation at least within one technical analysis.

If the price bounces off the level, the reversal should be clearly formed.

NOTE:

When opening a deal, you should pay attention to the fact that the price fixing should be followed by the pullback to the previous level, while the movement towards the breakout should continue afterwards.

How to Find the Right Entry Point in the Forex Market

The following can be used as additional signals that confirm the right entry:

  • Indicator signals (MA crossover, oscillator confirmations)
  • Candlestick liattern, e.g., a liin bar or engulfing liatterns formed in case of a bounce and giving a signal of a local lirice reversal
  • Technical analysis liatterns (“head and shoulders”, “flag”, etc.)

Traders’ Major Mistakes When Finding the Entry Point

The traders who are wondering how to find the entry points often make the following mistake: they miss some of the right position characteristics when opening a deal. Therefore, it’s common when traders guess the entry point but fail to get the direction right.

Mistake No. 1: Entry in case of exhausted movement potential

The entry point should not only give a signal to open a deal but also take into account the price movement potential in the direction.

It’s truly common when the price breaks out the resistance level and consolidates above it. It would seem that this pattern should give a signal to open a long position. However, after opening a deal, the trader notices that the prices again go below the level that was broken out and go in the opposite direction. A more detailed analysis shows that the price already reached the highs and the growth potential was exhausted when the pattern was formed.

How to avoid such mistakes:

  • When forming the entry point, you should take into account the situation related to the higher time frames. Sometimes one has only to look at the daily chart, as it becomes clear that the movement potential is exhausted.
  • Check ATR. If the price has already passed most of its daily range, it’s not recommended that you open a deal even if there is a technical signal.
  • You should connect indicators, such as an oscillator, to test overbought or oversold conditions.

Mistake No. 2: No exit point from your deal

The entry and exit points should be searched for simultaneously. When opening a position, you should clearly understand how and when you’ll exit it. Otherwise, you run the risk of losing not only a part of your profit but also going into the red.

How to avoid such consequences:

  • When searching for the entry point, think over your “escape plan”.
  • Decide what will be a signal to close a deal: reaching the next level, crossing the indicator lines, implementing a 1:3 risk/reward ratio or some other condition.
  • Choose how you’ll close a deal: take profit, manually or trailing stop.

Mistake No. 3: Unprofitable risk/reward ratio in a deal

Keep in mind that when you receive any entry signal from your trading strategy, this point should be checked using your risk management system.

To that end, take the following steps:

  • Set your stop loss according to the market signal (place it behind the high and low as a percentage of ATR).
  • Assess the movement range in your direction and determine where you’ll exit a deal.
  • Compare the stop loss and take profit ratio for this position. You can open a deal if it’s at least 1:2. However, the higher it is, the better conditions you’ll get.

Mistake No. 4: Ignoring news factors and fundamental analysis

Even if you don’t use the fundamental analysis in your trading strategy and when searching for some entry points in the forex market, keep in mind that the currencies can impulsively and unpredictably react to economic and political news.

This means that you can get kicked out from the trade by the stop loss (provided that you place one) even with the correct analysis. If worse comes to worst, you’ll suffer significant losses.

How to avoid such unenviable fate:

  • First, be sure to use the stop loss.
  • Second, check the economic calendar from time to time and don’t open new trades when major economic news is released.

How to Find the Forex Entry Point: Three Strategies to Try Out

We’ve already mentioned that the conditions that form the entry point depend on the trading strategy used by the trader. It’s extremely important that there is one time-tested strategy that offers a proven positive expectation.

PLEASE NOTE:

If you know several good trading strategies, you still shouldn’t use them in one trading account simultaneously.

Even the best trading system will give both profitable and unprofitable signals. Therefore, it’s important to take everything, as the prevalence of winning deals over losing deals will enable you to gain profit.

Below we’ll take a look at three groups of trading strategies based on which you can search for the entry points.

1. Trading strategy based on support and resistance levels

This strategy is based on the price behavior against strong technical levels. Having found them in the chart, you should track the price behavior against the contour lines. In this case, breakout or a bounce will serve as a signal to enter the position.

  • When the price bounces upward from the support level, it forms the buy entry point.
  • When the price bounces downward from the resistance level, it forms the sell entry point.
  • If the support level is pushed downward, you should wait for the price to bounce back to the broken level. A downward bounce will give a sell signal.
  • Similarly, the breakout of the resistance level followed by the price rollback to that level and its confirmation as a new support form the buy entry point.

2. How to trade the news

As you know, any important economic news may be accompanied by an increase in market volatility. News trading strategies allow you to benefit from it and thus gain profit. To that end, you should select some important news (marked with three volatility signs) in the economic calendar. They tend to provide the greatest price momentum.

Pending orders are placed to break in both directions from the current price value on currency charts, which may be impacted by this news, 10–15 minutes before the event.

If the actual values differ from those set out in the forecast, a surge in volatility is expectable, which typically opens one of the pending orders. The second order is removed, while a stop loss should be placed in its place. In case of an open position, you should take your profit either manually when the price impulse weakens or using a trailing stop.

3. Indicator strategies

Such strategies are most often based on a combination of two or three indicators. You can get the most accurate entries when trend indicators, such as a moving average, are used in conjunction with an oscillator. This enables you to filter out false signals and increase the number of profitable entry points.

TOP 3 profitable Forex strategies


What to know:


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