Itâs All About the Direction

charts · Sep 29, 2010

The concept for gaining an edge with your entry is straight-forward: require the market to move in your desired direction before entering. Some readers may be thinking that this is too simplistic to be useful; however, my research and practice show otherwise. Letâs look at some proponents of the practice and some examples of when and why it works.

First, Van published the results from a study based on this concept in our book Safe Strategies for Financial Freedom. Van looked at a series of trades that Steve Sjuggerud recommended as investments for the Oxford Club.

With just Steveâs recommendation and no other entry criteria, the picks were quite good, averaging a gain of 2.5 times the initial risk or 2.5R. When Van added the entry condition that required the stock price to move up for one month before entry was allowed, the results were dramatic. Rather than earning 2.5R, the trades with the directional entry requirement returned a whopping 6.4R or 6.4 times the initial risk!

We felt that this entry strategy was so compelling that we made it one of the âsix keys to investment successâ presented in the book.

My good friend and systems maven Chuck LeBeau has always been a big fan of requiring the market to move in the direction of your trade as a requirement for entry. On several occasions Chuck helped me to improve already profitable trading systems by applying this simple concept.

A directional entry works not only for longer term trades like those that Van cited in our book but also in short time frames. We also reviewed an intraday trading system called the 10-Minute Trader strategy in the Safe Strategies book. It produced excellent results in large part because of the requirement that price moves in the direction of the trade on an intraday basis before a trade could be entered.

As with almost all trading system design choices, the trader has to consider the tradeoffs for a directional entry requirement. Waiting for confirmation of a price move in your favor means that your initial stops have to be a bit wider (farther from entry). Still, my research has shown that for most cases, this âdisadvantageâ is more than made up by the avoidance of strong momentum moves against the trade. It basically ensures that you wonât try to catch a falling piano for long trades (wait for it to bounce first!) or step in front of a freight train for short trades.

I hope you can use this simple edge in your trading and investing. ...
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Itâs All About the Direction

charts

Itâs All About the Direction