Stock Price Entry

What do you spend your time on when developing or using a trading system? If you are like 99% of traders, you spend most of your time fidgeting with the entry. You are worried about breakouts or volume surges or ADX. And if you are, you are wasting your time.

Now don’t get me wrong, proper entry is important. Entry gets you into the trade but it only contributes to 10% of the profits.  It would be as if you were building a home and spent most of your time concentrating on the entry way and ignoring the foundation, walls and roof. It is your exit and money management that will provide the other 90% of the profit.

Don’t believe me? You can make money with random entries provided you have good exits and proper money management.

Tom Basso designed a simple, random-entry trading system … We determined the volatility of the market by a 10-day exponential moving average of the average true range. Our initial stop was three times that volatility reading. Once entry occurred by a coin flip, the same three-times-volatility stop was trailed from the close. However, the stop could only move in our favor. Thus, the stop moved closer whenever the markets moved in our favor or whenever volatility shrank. We also used a 1% risk model for our position-sizing system. ...

We ran it on 10 markets. And it was always, in each market, either long or short depending upon a coin flip. ... It made money 100% of the time when a simple 1% risk money management system was added. ... The system had a (trade success) reliability of 38%, which is about average for a trend-following system.

Source: Van K. Tharp , Trade Your Way to Financial Freedom

What this shows is that most traders “spin their wheels” trying to get in at the proper price, use stops and limits and every trick that they can think of and still cannot make money. It shows that you must pay attention to exits and money management. Think of the money you could make if you have a good entry system and could exit properly.

I’ll leave you with one final thought:

"People just seem to want to ignore exits -- perhaps because they cannot control the market on the exit. Yet for those who want control, exits do control two important variables -- whether or not you'll make a profit and how much profit you will make."

Source: Van K. Tharp , Trade Your Way to Financial Freedom