Swing Trade Entries
A question here from Carrick asking us when is the best time to take a swing trade entry? Do we need to wait for a pullback or should we wait for the sentiment to turn? Or should we just enter from a hard predefined level?
Timing can often be a tricky part in trading.
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There’s often lots of research being done about market timing, saying that time in the market is more important than timing the market. Now even though I agree with that statement, in terms of long term long only investments, like your retirement fund, investment funds, et cetera, it is very different when it comes to short term trading, such as day trading and even swing trading, where your time horizon for trading is much shorter than a traditional type of investment.
So, what is the best time for swing trading to enter the market? Now, if there was an obvious perfect entry, everybody would just, they wouldn’t be this question, so everybody would use that perfect method. So, the generally speaking there’s two approaches, but none of them, none of these two are perfect.
So, in both cases, the very first step, whether you take the first or the second approach, the very first thing that you always need to do is make sure that you conduct your fundamental analysis to make sure that you’re trading in the right direction. And then you need to either rely on a purely technical entry by considering the current pullback in the trend that you’re looking at.
Let’s go to a higher time frame for this, for the Aussie dollar versus the US dollar. So, obviously, let’s say you’ve done your analysis, then what you can do from the first method, looking at a purely technical method is you can consider a possible entry by looking at various technical strategies.
You can consider the pullback in terms of support resistance zones, you could look at psychological levels, you could look at swing points, you could even look at Fibonacci retracement.
Now, the second method or approach is to wait for the short term sentiment to end. So basically, waiting for the short term sentiment that is currently pushing this pay against the fundamental bias, wait for that to end before you take your entry. Now, there is no perfect or right and wrong when it comes to whether you take the purely technical entry approach or whether you take a sentiment approach, there’s gonna be pros and cons to both.
So, if you take a purely technical entry, you drastically increase your chances of entering the trade from a higher probability level. So, you always get a higher probability of entering because you’re not waiting for sentiment, you’re basically entering from a particular area that you view as having a high probability.
Now, the con here is that you might be entering when the short term sentiment is so strong that you might be sitting in an immediate draw down for quite a long time until you wait for that sentiment in the short term to actually run out. So, you might be entering, yeah, but it might be going up all the way back up, as long as that sentiment last and then only it starts to turn down.
Then with the second approach, you basically wait for the sentiment to change. So generally, the way that we prefer to do it is by waiting for that short term sentiment to realign with the fundamental approach, the pros of that is that you only trade when the macro and the sentiment theme is aligned, giving you a much higher conviction in the trade, especially in the short term.
The cons there however is that the sentiment can sometimes change so quick and so volatile that you might not get a good entry, and you might not get an entry at all. So, there might not be a pullback. What can happen if you wait for sentiment is you might not get a pullback, you might see this thing, just tumbling down, tumbling down, tumbling down, without having any pull backs.
So, it is really subjective, sometimes it’s gonna be better to wait for technical entry, sometimes it’ll be better to wait for the sentiment to change. Obviously, in hindsight, it’s gonna be an exact science.
So, in hindsight, you could have said, “obviously, I needed to wait for this or that”, so, it’s never gonna be perfect. But generally speaking, the higher probability opportunities is waiting for the sentiment to change in line and then trading it to the downside. Just trust in the fundamentals to move that in the right direction.