Entries: To fight for every pip, or not?
Deciding how to manage your entries
Trading successfully can be quite a challenge. Interpreting sentiment, understanding the fundamental outlook for a currency, pairing it suitably with another currency, and then managing your risk are all hard enough. However, once you have done all that a key question still remains: when and where should you enter the trade? How do you manage the entry, so you don't have to a) endure lots of drawdown and b) suffer too much financial pain if you are wrong? This article will consider when you shouldn't be for fighting for every pip in your entry, and when you should be.
Times when you shouldn't fight for every pip
Trading the squawk
There are definitely times in your trading when you should not be overly concerned with your entry price. There are times in trading when you want to be in as soon as possible. When might these occasions be? This is particularly true in trading headline news. For example, there has recently been a good deal of tradable news headlines on two key political and financial events; namely NAFTA and Brexit.
Now, when the news first came out in the squawk a couple of weeks ago that Mexico and the US had ironed out their disagreements over the NAFTA deal there was an immediate reaction as the Mexican Peso gained value. This would be an instant when you would not want to worry about your entry value, just get in as soon as possible, USD/MXN short. Similarly, when the EU's negotiator Michel Barnier stated that he was prepared to offer Britain a deal with the EU, like no other country, the GBP rallied quickly. This was not the time to wait for a 'perfect entry', as the news was so significant that the GBP would rally for a good 50+ points. Not bad for a headline.
Trading surprise announcementsYou have an interest rate announcement coming up for a central bank. The chances of a rate hike are seen as 2%, but then the central bank makes a massive surprise move and hikes their interest rates. This is the sort of time when you just enter in as soon as possible. In the chart below you can see when the Bank of Canada surprised markets with an interest rate hike CAD appreciated for the next few weeks on the back of that one decision. That is not the time to be concerned about a 'perfect entry', simply make sure you are in the trade. At first, this can seem hard, but overtime you develop a good understanding of which trades you just want to get in straight away.
Times when you should fight for every pip
Say, you are trading a currency pair in the Asian session. Perhaps you don't want to be awake/at the screen during the session and you know that ranges tend to narrow during that session. Well, you might choose a currency pair that is unlikely to be affected by any Asian session news and try a technical bounce off a key level. In this instance you would want to make sure you set your entry very carefully, as overnight moves tend to be smaller and technical ranges come into play when there is no market news to move price in a strong direction.
When you want to be in, but not at any priceA recent example of when it would be appropriate to do this can be seen in the USD/CAD chart when there was a significant deviation for Canada's CPI reading. It was expected to be 2.5% y/y and instead it was released as 3.0% y/y.Say you came to the chart and you saw that price had already traveled a long way from the news announcement. By drawing a fibonacci level on the chart you could have entered in at the 38.2% level and round number of 1.31000. In this situation you may not want to chase price, but instead 'fight for your entry'. The only weakness with this approach is price may not retrace to your fib level and you may miss out on a potentially profitable trade.
When you correctly analyse a currencies direction, but it's extended
Sometimes you will quickly analyse a currencies direction, but you will see that price is already heavily extended in one particular direction. In this instance, you don't want to simply jump into the market as there is always a natural ebb and flow in price. Not every interaction with the market is due to speculators. There are many currency transactions that take place every day for a variety of business and government reasons. Staff have to be paid, currencies need to be converted, and balance sheets need to be adjusted. So, prices will often pull back in a trend. If you get into the habit of buying at any price, you make your risk of drawdown considerable. Also, you will have to use a large stop to allow for a normal technical pullback, say to a moving average. This is when you want to take an entry that allows for a reasonable, but not too large a stop.
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