The money management decision is taken to dictate the level of involvement within a market. The following step is the actual purchase or sale which sometimes can be the most difficult part of the whole process. To actually place a trade as to how and where to enter the market is a combination of technical factors, money management and your trading type.
Technical Analysis in Timing Trades
Timing Tactics on Breakouts
You’re always with a dilemma of taking a position in expectation of a breakout. For example do you wish to take a position on the breakout itself or wait for the pullback or reaction after the breakout takes place? If you are trading on several trades at the same time, you can use each trade for each scenario.
Let’s assume the position is taken in anticipation of an upside breakdown. The payoff is higher when the anticipated breakout occurs. However, your odds of a bad trade are increased. If you wish to wait until the actual breakout takes place then your success odds increased however, you would be penalised with a higher entry point. To wait for the pullback is the most sensible compromise given that the pullback occurs. But remember that the market does not give the luxury to patient traders for a second chance because the risk related waiting the actual pullback increases the chances of missing the market.
You can simplify your dilemma through trading multiple orders. You can split your trades with a small portion for anticipation of the breakout. When the breakout occurs you can then buy some more and add a little more for a corrective dip after the breakout.
This technique is very useful as for an early entry or an exit signal. The breaking of a tight trendline is usually a very good action signal when you are looking to enter a new position on a technical sign of a trend. It is also very useful to exit an old position. You need to bear in mind that you always need to take into account additional technical factors. Buying against a major up trendline or selling against a down trendline can be a very effective timing strategy.
Use of Support and Resistance
As you already know support and resistance levels are very good when it comes to entry or exit the market. When you have a break of a resistance, this is a signal for a long position and you can set up your stop losses under the nearest support levels. A closer stop loss can be used just below the actual breakout of the resistance level that will function now as a new support level. If you have a rally to a resistance in a downtrend or a decline to support in an uptrend, this can be used to enter new positions. The stop loss support and resistance levels are most valuable.
The Use of Percentage Retracements
When there is an uptrend, pullbacks that retrace close to 40-60% of the previous advance can be used for new long positions. When you have a 40% pullback after a bullish breakout this can be taken as an indication for a buying opportunity. On the other side, bounces of 40-60% provide good short opportunities in downtrends.
Technical Concepts Combination
To be more effective you need to combine these technical concepts. The most important matter discussed at this point is the timing. The basic decision to buy or sell has already been made. You need to fine tune your entry and exit point. When a buy signal appears, you want to get the best possible price. The idea is to buy near support but to exit quickly if that support is broken and the opposite when it comes to resistance.
Summary of Money Management and Trading Guidelines