What is an Entry Strategy?
- Written by: a Guest Writer
A good day trader has two things they’re always mindful of: volatility and liquidity. Typically, stocks that possess these two traits are ideal for day trading. Volatility is the range of prices that a stock has throughout the day, while liquidity allows traders to get in and out of a trade at the price they want. This means having a tight spread between the bid and ask price of a stock and little slippage between what the bid is and what price it will be when that trade occurs. Once you’ve identified a stock with these characteristics the next step is to identify a possible entry point.
Finding an entry point can be accomplished by using the following tools:
Intraday Candlestick Charts that show analysis of price movements. An Intraday candle chart shows the price of a security at its open, close, high, and low over the course of one trading day.
Level II Quotes and ECN offer improved market access for day traders. ECN (Electronic Communication Network) allows traders to execute trades without the help of a middleman, while Level II is a trading service that allows traders to watch trades being executed in real time.
A Real-Time News Service is important because the news of the day influences price movements.
To help illustrate our point, let’s use an example to show how Intraday Candlestick Charts can help a day trader find an entry point. When using this tool, it’s important to keep in mind things like the stock’s chart patterns, recent trends, and volume.
Day traders are often trying to identify a particular setup when they are looking at candlesticks. The Doji reversal pattern is one such setup. A Doji is a candlestick pattern that takes shape when a stock’s open and close are virtually equal. A reversal is a change in the direction of a price trend.
Once a Doji reversal pattern is identified, there are three factors to consider:
* Traders need to look for a spike in volume. Are other traders supporting the price change?
* Next, traders need to look at the support level indicators. Has the price of the stock fallen below this level before? What was the previous low of the day?
* Finally, traders need to examine the Level II landscape. How many open orders for the stock are out there? How big are the orders?
Following these three steps will allow traders to make an educated decision on whether or not the Doji is likely to have a turnaround. If the conditions are favorable with respect to volatility and liquidity, a solid entry point has been found.
Learning how to identify and assess an entry strategy is essential in developing your own personal day trading style. At HFTrading, we have education and mentoring programs that will show you how to use entry strategies to your advantage and learn how to become a trader!
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