Any trading plan (or strategy for that matter) should include clear entry and exit rules, otherwise it isn’t as effective. Even if you succeed in predicting the direction of the market, you need to have clear entry and exit guidelines that help you optimize your trading outcome. Entry rules tell you when to enter a trade, as there are usually certain conditions that must be met for you to jump in. Exit rules tell you when to exit a trade, also based on certain criteria being met.
Entry and exit rules help you not only improve your trading outcome, but also manage risk better and be less dependent on emotions. Below, you can find some useful entry and exit rules, based on the experience of many traders.
Good entry rules require that you use technical analysis, rather than fundamental analysis. In other words, once you master the art of correctly analyzing trends and movements, you can establish the right set of entry guidelines for your trading strategy. A good example of a technical analysis provider is TradingView, which when used with a supported broker such as easyMarkets can be a useful tool. Here are some examples:
- Draw support and resistance lines. As a rule, those lines should at least touch two lows or highs from previous price movements. Once you draw them, it is recommended that you enter long positions right after the price bounces of a support line upwards, and short positions after the price bounces of a resistance line downwards.
- Use pivot points. You can display pivot points by using the respective indicator available on most trading platforms. Pivot points give you information about the general trend of the market, based on previous movements. You can use those just like support and resistance lines. It is recommended to enter when the price reacts strangely to any given pivot point (that is, the price reverses direction), as that shows it is meaningful.
- Use the Ichimoku cloud and lines. The Ichimoku cloud and its associated lines are available on most platforms, and it is a great tool to use in trending markets. To enter a trade, wait for the Chiku span line to go below the cloud for short positions, or wait for the Chiku span line to go above the cloud for long positions. The Ichimoku cloud is more useful on larger time frames, such as the 4-hour or daily timeframes.
Generally, there are two considerations when choosing exit points. First, your risk tolerance level, and second, price action. You determine your risk tolerance based on your preferences, trade size and capital. Some useful exit rules can be found below:
- Use the Fib retracement tool. When you are in a trend trade and you see the price has retracted over 23 percent of the trend move, this can be a sign that the trend has weakened, or even that it is It is better to exit the trade at that point. Fibonacci retracement tool helps you identify important retracement levels.
- Use the latest swing high or low. You can set your stop less under the most recent swing low if you are in a long position, or above the latest swing high if you are in a short position. This helps keep losses at a minimum.
While you may not master all of those rules on the first day, practice makes perfect. Also, remember that those rules, especially exit rules, are important for risk and money management.