Entering trades at opportune points that offer favorable risk vs. reward is essential for trading success. But with endless setup possibilities, how do you determine which trades have the highest probabilities? It’s simple in theory — target trades that give an “edge” over randomly selecting entries. However, trade entry is part science, part art.
Let’s explore ten tips to trade smarter, not harder when seeking prime opportunities:
Trade with the Trend
Among the most important elements for gauging probability is trading in alignment with the trend. As the saying goes “the trend is your friend.” Strong upside or downside momentum greatly improve odds in your favor.
Check the direction of major moving averages like the 20 & 50-day moving averages to confirm the dominant trend. Additional confirming indicators like a moving average crossover, Parabolic SAR, or Ichimoku Cloud can verify trend strength.
Setups that trade against the prevailing trend have lower win rates. Save mean reversion strategies for ranging markets. When a strong trend exists, trade in its direction for the highest probability.
Time Retracement Entries
Powerful trends rarely move straight up or down. Periodic pullbacks and retracements are normal in an uptrend or downtrend. These bouts of countertrend movement offer low risk opportunities to join the prevailing trend.
For example, in an uptrend wait for pullbacks to logical support areas like prior swing lows, moving averages, or Fibonacci retracements. Enter long when buyers resume momentum off support. In downtrends, use bounces into resistance for shorting opportunities.
Timing entries after retracements results in much higher probability trades than randomly buying/shorting in the direction of the trend. This strategy provides confirmation the trend resumption is occurring.
Trade at Technical Breakout Levels
When price breaks out of well-defined trading ranges or chart patterns, a powerful move often follows as new volatility unleashes. Trade entries just as momentum surges offer great risk to reward scenarios.
Key breakout points include:
- Above prior swing high resistance
- Below prior swing low support
- Above descending trendlines/triangles in uptrends
- Below ascending trendlines/triangles in downtrends
- Outside range of consolidating symmetrical triangles or rectangles
Confirm breakout validity with increased volume. Initial stops below/above technical points protect capital if the breakout fails. If upside or downside follow-through occurs after entry, ride momentum as far as possible.
Pick Your Spots Wisely
Even with a solid trading strategy, limit trades to the ones with optimal technical alignment. Amateurs tend to overtrade by forcing marginal setups or guessing entries randomly. Remember that not every trading session, or even every week, will offer trades with strong risk to reward prospects.
Be selective and target only prime setups with multiple factors of confluence. For example, a retracement to a key moving average or Fibonacci level that coincides with bullish candlestick signals and a momentum oscillator crossover. If criteria isn’t met, better to sit on the sidelines than take weak trades.
Patience both in waiting for ideal entries and avoiding mediocre trades separates professionals from beginners. Pick your spots wisely. Quality over quantity will lead to higher win rates.
Leverage Candlestick Signals
While often utilized more for analysis, candlestick patterns provide powerful trade entry information as well. Certain candle signals high up in bullish trends or low down in bearish moves can tip you off to continuations with optimal timing.
Watch for these confirming candlestick signals:
- Bullish Engulfing patterns after pullbacks in uptrends
- Piercing Line and Morning Star patterns bouncing from support
- Bearish Engulfing patterns on rallies in downtrends
- Evening Star and Dark Cloud Cover patterns at resistance
Candlestick signals identify points where bulls or bears have wrestled control back from counter-momentum retracements. This tips the odds toward continued trend direction.
Combine candles with other entry techniques for very high probability setups. For example, a Bullish Engulfing candle combined with a break above the 20-day moving average after a retracement. Leverage candle patterns to pinpoint prime market timing.
Use Momentum Oscillators
Momentum oscillators like the RSI, Stochastics, and MACD indicator help define trade entry points with greater precision. Divergences between price and oscillator readings mark high probability reversal zones.
Two scenarios to target:
- Overbought/oversold readings: Enter trades when the oscillator exits extreme areas which signal exhausted momentum. For example, looking to buy when the RSI exits oversold levels below 30.
- Divergences: When price makes a higher high but the oscillator makes a lower high, look to fade the most recent price swing. The opposite is true for bearish divergences — lower swing low price but higher oscillator low.
Combine oscillator signals with your other technical or trend analysis for very specific market timing. Oscillators greatly enhance entry precision on high probability continuations as well as reversals.
Watch Relative Strength
Analyze how your trading instrument performs relative to its broader market or sector to gauge trends and the strength of breakouts. Securities exhibiting strong relative strength vs. the market have the best momentum.
For example, when the S&P 500 makes new highs, does your stock also breakout to new highs or fail to exceed previous price levels? Strong relative strength stocks confirm the broad market direction and outperform. You want to be trading in the names showing leadership, not lagging.
For determining entries, buy breakouts in leading stocks showing strong relative strength in uptrends. Avoid breakdowns in lagging stocks as they signal relative weakness. Always evaluate relative strength to pick the optimal security to trade a broader market/sector signal.
Scale In To Trades
Rather than entering the full position at once, scale into trades to gain better average entry price and increased flexibility. This helps reduce risk and improve the cost basis on trades.
For example, instead of buying 1000 shares at $20 all at once, buy:
- 400 shares at $20
- 300 shares at $19
- 300 shares at $18
Now you have 1000 shares at a $19 average entry vs. $20. In a downtrend, scale in the opposite direction — start short at resistance, add higher up. Scaling in is a key for long-term winners.
The concept also applies to options trading. For example, buying 1 call option, then adding another call later at a lower strike after pullback. This accumulates greater upside exposure while lowering breakeven points.
Use Stop Orders Wisely
Stop market orders placed just outside key technical points allow trades to trigger automatically when price levels are breached. This ensures swift entries or exits using predefined criteria.
However, avoid placing actual stop orders too close to current price levels. Keep distance to account for short-term volatility and whipsaws which could trigger the stop prematurely. Use wider stops and suppress the urge to micro-manage.
Also beware of tighter stops getting “run” by intraday market makers and algorithms gunning for stops. Consider using limit orders instead which won’t guarantee execution but won’t enter at bad levels during stop runs.
Get help determining smart stop distances from your trading coach, courses and books, or select trading tools. Place stops wisely for trade entries and exits to optimize results.
Review and Refine Your Process
Finding the highest probability trades involves an ever-evolving process of continual review and refinement. Analyze both winning and losing trades to identify what worked and what didn’t. Look for any weaknesses in your entry criteria or flaws in trade management.
Maintain a trading journal to document learnings. Study your metrics and equity curve peaks and valleys. Uncover what market conditions, setups, and time frames you trade best and where vulnerabilities lie. Eliminate patterns of losing trades and expand on what brings consistent success.
Ongoing review enables steadily modifying your edge to cut out marginal trades and flawed strategies. Build on strengths and and reduce weak links. Trading success develops through knowledge compounding over time.
Avoid Analysis Paralysis
For all the technical indicators, chart patterns, and analytical tools — don’t fall into “analysis paralysis.” At some point, you must pull the trigger on trades. Develop parameters you feel gives an edge, then act decisively on signals.
Overtrading generates losses through impatience and impulsiveness. But excessive analysis often leads to trading too little or constantly second-guessing setups. Let the probabilities and your strategy guide which trades to take. Eliminate doubts by establishing an edge through practice and experience.
Mastery develops instinct. If a high probability setup aligns with your system, act on it. But don’t force poor trades or overcomplicate decision making. Find a balance between analysis and instincts you can repeat consistently.
Choose your weapons wisely by leveraging the highest probability trade techniques covered today. But also recognize that trading success requires intuition built over time. Don’t outthink the intelligence that comes from experience — trust your process.
Avoid Chasing Trades
One final pitfall to avoid is chasing trades and forcing low probability entries out of FOMO — fear of missing out. The urge to jump into trades too late after the move has begun usually ends badly. Never rush trades.
Remember, opportunities arise all the time in the markets over weeks, months, and years. Don’t obsess over the ones you miss or you’ll make emotional mistakes. Wait calmly for the next favorable setup. Patience and discipline are integral to longevity as a trader.
Trading is a game of consistency applied over the long-term, not any single trade. Focus on executing high probability trades aligned with your strategy rather than chasing action or random tips. Build your account deliberately over time.
The Key Is Finding Your “Edge”
Mastering trade entry boils down to isolating the strategical “edges” that work in your chosen market and time frame. Your edge represents any well-defined and consistent principles, patterns or methods that put probabilities of success in your favor.
Edges could involve combinations of chart patterns, candle signals, technical indicators, trend identification, trading psychology, risk management and more. Through practice, analysis, and screen time you must discover your own unique edge.
The tips covered today provide potential starting points for isolating a strategic advantage in the markets. But remember…edges are fluid and evolve constantly as you gain knowledge and experience. Keep building on what works and eliminating what doesn’t to trade smarter over time.
The markets offer endless complexities. But high probability trading relies on simplicity and clarity — not complexity. Define your edge with precision as the foundation. Execute trades decisively when criteria are met. Remove emotions or arbitrary actions from the process as much as possible.
Trading mastery develops methodically through screen time, data analysis, and repeating patterns that generate profits over hundreds of trades. But also allow your hard-earned experience to guide instincts. Find the optimal balance between data-driven probabilities and intuition.
The paradox of trade entries is they seem easy in hindsight, but prove extremely tough in real time. By focusing on high probability setups and honing your edge through ongoing learning, you tip the odds in your favor. Trade smarter, not harder to beat the markets consistently over the long haul.
Disclaimer: Trading and Investing involves risks, and this article is for informational purposes only. It does not constitute financial advice. Always do your own research and consult with a qualified financial professional before making investment decisions.
