There are numerous ways to enter a trade. In fact, there is no right or wrong way. Your goal is to use your entry point to maximise your profits. The less efficient your entry is, the less profit you will make. It’s why I thought I’d share my Forex trading entry strategy.
To make this article useful and realistic, I’ve split it into two parts. First, I’ll walk you through the principles of support and resistance. Second, I’ll explain how you can use technical indicators to confirm levels of support and resistance.
Do you understand the fundamentals?
While entry points are important, some traders have a tendency to obsess over them unnecessarily. Instead, you should prioritise understanding the reason behind price changes. That’s the first lesson of this article. Focus your attention on the fundamental reason behind a price move – it’s the most important factor.
If you don’t understand fundamental analysis – and are therefore not using it to reach trading decisions – you will struggle to be profitable on a consistent basis.
Remember, fundamental analysis is a means of reaching a clear idea about future price direction. It can also help us determine whether a move is better served by a short-term or long-term trade.
There are many other articles that explore fundamental analysis in detail. If you’re new to the concept, I encourage you to read my introductory article.
How I enter trades
If you are trading in line with the fundamentals, then a wide variety of entry techniques are likely to work well.
Going forward, I’m going to assume that you are using fundamental analysis as part of your routine. In this section, I’m going to explore some specific technical elements that can help identify a good entry point.
When using technical analysis to help me find an entry, I focus on identifying specific price levels where there is likely to be a market reaction. Of course, these are commonly known as support and resistance levels.
You can expect price to react at these levels because they are psychological price floors (support) and ceilings (resistance). In other words, price has changed direction at these levels in the recent past. The previous reaction actually means there is a high chance of a reaction happening again.
Looking at price charts
It’s easy to identify support and resistance levels when looking at a price chart. Across any given timeframe, you can clearly see where the price of a currency pair changes direction.
But that’s not the only way to spot psychological price floors and ceilings. You can also use other price levels to help predict where the market might be looking to buy or sell from. Examples of this include price that levels that end in a double zero or fifty, such as:
Because these are clear price levels, they have psychological significance to the market as a whole. For example, traders are much more likely to trade from these clear levels, rather than something in between, such as 1.1343.
Beyond these psychological levels, you can also use other means to confirm entry points. These come in the form of technical indicators. These indicators are generally overlaid onto a basic price chart.
There are many technical indicators that traders can use. This can be problematic, as it can lead to a delay in decision making.
However, there are two indicators in particular that I favour. They are Fibonacci retracements and pivot point indicators. These indicators are useful because they generate price levels that correspond to the current price of a currency pair. Therefore, I use these tools to confirm the psychological levels discussed above. Here’s my process step-by-step:
- I identify points of support and resistance by looking at a price chart over a particular timeframe (usually 15 minutes, one hour or four hours).
- I then make note of the nearest double zero and fifty price levels.
- To check my identified price levels, I apply the Fibonacci retracement tool and the pivot point indicator.
- Should the technical indicators overlap, or land close to my original levels of support and resistance, my entry point is the confirmed. This phenomenon is known as confluence.
By following this process, you can see that I use confluence to confirm my entry points. Clearly, the more methods I use to confirm a point of confluence, the better. My advice is to confirm a point of confluence by at least two separate means.
Generally, the larger the gap between current price and your confirmed entry point, the better. This is because the price has more room to run – making a market reaction more likely when it reaches the next level of support or resistance.
Forex trading entry strategy
By using confluence to confirm your entry points, you will start to trade in a more consistent fashion. What’s more, you’ll also get into the habit of entering trades at the optimum time. By making the most of anticipated price movements, you’ll increase your profitability.
Another benefit of using confluence relates to stop losses. A strong point of confluence allows you to identify a price point at which to apply a tight stop loss. This is especially effective for short-term trades.
If price does break through a point of confluence, it’s usually because a trader has a flawed analysis. Remember, price does occasionally breach points of support and resistance. However, there’s usually an obvious fundamental reason why this happens. The good news here is that by applying a tight stop loss close to your point of confluence, you can substantially minimise your exposure.
I hope you’ve found this article useful. If you have any questions, please leave them in the comments below. I’ll do my best to reply to as many as I can.