DEFINITION of Entry Point
Entry point is the price at which an investor buys an investment. The entry point is usually a component of a predetermined trading strategy for minimizing investment risk and removing the emotion from trading decisions. Recognizing a good entry point is the first step in achieving a successful trade.
BREAKING DOWN Entry Point
For example, an investor researches and identifies an attractive stock, but feels that it is overpriced. He or she will buy if the price decreases to a certain level; this is the entry point. Exercising patience and waiting for the right time to buy helps investors earn better returns on their investments. Determining both an entry point and exit point in advance is important for maximizing returns. Investors must ensure there is sufficient distance between the entry and exit point to allow a risk-reward ratio of at least 2:1.
Optimizing Entry Points
Trending Markets: Good entry points in a trending market come after a short countertrend move or a period of consolidation. Investors can use trendlines, moving averages and indicators to help determine suitable entries. For example, on the chart below, there was a confluence of support that produced a high probability entry point at the $34 level. Prices had returned to the trendline; the stochastic oscillator was below 20, which suggested the stock was oversold; and the 60-day moving average was acting as support. Additionally, a spinning top candlestick pattern formed after a period of selling which hinted that the countertrend move was concluding. As can be seen on the chart, this did turn out to be a good entry point.
Trending Entry Point
Range Bound Markets: Suitable entry points in range bound markets are typically near key support and resistance levels. Using trendlines to connect peaks and troughs helps to define support and resistance areas on a chart. For instance, the chart below has a trading range between $22 and 27.5. A high probability entry point for a long trade would be near the support trendline, while a high probability entry point for a short position would be close to the resistance trendline. Investors who use this method for selecting an entry point may wait for a head-fake move above or below a significant support or resistance level before taking a trade.
Range Bound Entry Point
Streamlining Entry Points
Trade entries can be streamlined by using a strict set of rules. For example, an investor’s trading strategy may only generate an entry point when a stock crosses its 200-day moving average and the moving average convergence divergence signal line crosses 0. To automate the process further, entry points can be programmed into trading algorithms that automatically place trades when the conditions are met. Algorithms should also include exit points and risk management rules. (For further reading, see: Basics of Algorithmic Trading: Concepts and Examples.)