Hi Guys, I found this lesson very helpful and I felt my readers will also appreciate it.
Any trading strategy starts with a universe of securities from which you can make your selection. It`s often easy to pick the universe of securities you are going to trade in, but harder to know which securities within that universe you're going to trade.
There are many securities to choose from and there are vast arrays of factors which can influence the price of a security; so, where do you start? The answer lies in stock screening. Stock screening is a basic trading strategy that involves the trader screening the entire universe of securities for potentially favorable investments.
Just like sifting through a bucket of sand trying to find pieces of gold, the same approach is used to reduce your universe of securities to a more favorable selection. After you have reduced the universe of securities, you can continue your filtering process, until you find the most
attractive candidate for trading.
This filtering process is best defined as a strict set of rules. But, there is a problem. The problem is that there are as many theories on buy-on-sell price points as there are investors and traders around the world.
Your personal approach to entries should be simple, direct and leave nothing to human judgment. This is contrary to what most traders do who buy stocks based on media reports,
expert opinions, rumors or "gut feel." The good news is that by acting contrarily, you will do what most traders never do: make a profit.
Most investors believe that the key to success is being able to pick the winning trades. This is why 99% of traders, spend most of their time fidgeting with the entry. They are looking for the Holy Grail. Remember, there is no Holy Grail.
Now don`t get me wrong, proper entry is important. Entry gets you into the trade but it only contributes to 10% of the profits. It would be as if you were building a home and spent most of your time concentrating on the entry way and ignoring the foundation, walls and roof. Your exit and money management (foundation, walls and roof) will provide the other 90% of the profit.
Actually, it has been proven that with good exits and money management, you can even profit on random entries into the market. Take the following real-life example:
Tom Basso designed a simple, random-entry trading system... We determined the volatility of the market by a 10-day exponential moving average of the average true range. Our initial stop was three times that volatility reading. Once entry occurred by a coin flip, the same three-times-volatility stop was trailed from the close.
However, the stop could only move in our favor. Thus, the stop moved closer whenever the markets moved in our favor or whenever volatility shrank. We also used a 1% risk model for
our position-sizing system...
We ran it on 10 markets. It was always, in each market, either long or short depending upon a coin flip... It made money 100% of the time when a simple 1% risk money management system was added... The system had a (trade success) reliability of 38%, which is about average for a
trend-following system.
Source: Van K. Tharp, Trade Your Way to Financial Freedom
http://www.meta-formula.com/
This best illustrates that although entry is important it is probably the least most important aspect of designing a trading plan. Moreover, most traders "spin their wheels" trying to get in at the proper price using stops, limits and every other trick in the book even though this is not
where the money is made. The money is made by paying close attention to money management. (More on this in the next chapter.) However, the fact remains you still need some method of entry.
Just as many traders have done before me, I have spent countless hours researching different entry signals looking for that elusive Holy Grail. Would you like to know what I discovered? Quite simply, it is easier to copycat your way to success than to try to re-invent the wheel.
According to Anthony Robbins (The USA personal development guru and lifestyle coach to presidents and famous actors,) the way to get the best health is to find the healthiest people we can find and ask them what it is they are doing and thinking to be so healthy. Similarly, the way to select your entry rules is to copy a proven system!
That is how the smart (and rich) people do it.
Sure, you can waste months and spend thousands of dollars testing different methods, but why put yourself through that?
Personally, I would rather be a "wealthy copycat" than a "broke original thinker."
For this reason (and to shortcut your way to trading success) I have hand picked the best entry systems available for your chosen market. Please, understand that I am by no means saying that without these entry systems you will fail, but instead I offer you two choices:
1. You can design your own entry rules, back testing thousands of variables yourself. This can take a lifetime in itself. Just look at Fibonacci or Gann who spent the majority of their lives perfecting their entry systems.
To be continued
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