How To Enter A Position With Your Stock Trade

Provided By Ultimate Trading Systems

Finding A Low Risk Entry Point For Your Stock Trade

Finding a low-risk entry point for a stock trade is every bit as important as finding a good stock trade. How can this be? Think about it for a few seconds and you'll realize that you can pick the best stock trade in the world, but if you enter it at the wrong place, you may make no profit on it at all - and you may actually lose money.

Nobody knows, for instance, which stock trade is going to make them rich in five or ten years. Many companies won't even be around in five or ten years. Doesn't it make sense for anyone, trader or investor, to enter a stock trade at a point where it has a better chance of actually making them money instead of losing them so much that they have to wait five years just to get their initial investment back? Or to enter any other stock trade in any other investment vehicle at a point where making money is possible?

Where is a safe entry point for your stock trade, and how do you make sure you enter there?

Finding a sensible entry point for your stock trade involves knowing the time frame of your stock trade (for a particular trend trade, for example, you might know that you should enter no earlier than a week before the event creating the trend); looking at charts to see where the stock trade has been and where its support and resistance levels are (and thinking about psychological support and resistance levels); and waiting for a pullback in price if you believe that the price is temporarily high and that it will drop and create a better buying opportunity for you.

The way to make sure you enter the stock trade where you plan to is to use a limit order. (A limit order is an order that can execute only at the stated price or better.) Limit orders sometimes make you wait behind others who placed their orders at the same price before you did, but in most situations, placing a reasonable limit order is the only smart way to enter a stock trade.

In certain situations, it may make sense to stagger your entry by buying half the shares you want at a price you think may be the lowest the stock trade will reach, and then waiting to buy the other half either when the price does get better ("averaging down") or when the stock trade starts to move ("adding on strength.")

The wrong way to enter a position is to chase a moving stock trade. Chasing stock trades is a form of panic, and it practically guarantees that you'll pay too much for the stock trade. Why is it so bad to pay too much? The more you pay for a stock trade, the further your risk-to-reward ratio is shifted away from reward (because your upside is decreased) and toward risk (because the probability of the run ending increases as the stock trade gets more and more expensive.) There are two ways to look at the decrease in your upside:

First of all, you'll capture less of the stock trade's movement, so your percentage return will be less; second, the more the stock trade’s costs per share, the fewer shares you'll be able to buy, and any return you get will be multiplied by fewer shares. So your entry price matters greatly.

Also remember, it doesn't matter if you miss a stock trade or a position. It’s not the last good stock trade. There will always be more stock trade’s to make. It's much better to miss a stock trade than to chase it and end up with a loss. Morning gaps down present good opportunities to buy stocks you want.

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