How to identify entry points in day trading
Deciding on when and where to enter or exit a trade is a crucial component of any forex trading strategy. The task tends to be challenging for experienced and novice traders alike.
To begin with, there are numerous elements that influence the direction of the market. Besides, the market trends are constantly shifting.
As such, hesitating to enter or exit a trade by even a minute may reduce your potential profits or increase your risk of incurring losses. In this article, we will focus on how to identify entry points in trading.
Conduct a Detailed Fundamental Analysis
Whether you intend to trade shares, currencies, commodities, or indices, fundamental analysis is a crucial strategy in identifying an entry level.
While the aspects to look out for depend on what you intend to trade, the purpose of a fundamental analysis is to evaluate the asset’s intrinsic value.
For instance, if you are looking for an entry point in a stock trade, start by evaluating the company’s financial ratios.
The ratios to evaluate include the PBV (Price to Book Value) ratio, PE (Price to Earnings) ratio, dividend yield, and its current ratio.
Financial reports & competitors
Next, look at the firm’s financial reports, its competitors, and future prospects.
In the case of forex trading, your fundamental analysis should focus on economic indicators that can influence the movement of a particular currency.
Numbers such a country’s GDP, industrial production, retail sales, purchasing managers index (PMI), consumer price index (CPI), and employment data will come in handy.
Perform a Technical Analysis
In trading, a technical analysis utilizes relevant statistics and price charts. Studying the prior market patterns will help you make an accurate prediction of the future price trends.
The main advantage of technical analysis is that it offers reliable signals for price movements; a component that is effective in any trading strategy.
While the technical analysis is an efficient approach of determining your entry point in a trade, it is important to note that the approach is not 100% accurate.
How to reduce the margin of error
There are certain aspects of the market that are unpredictable. As part of your risk management strategy, use several analysis tools and indicators.
Some of the reliable tools for the technical analysis include:
- Support and resistance levels
- Fibonacci retracement
- Relative Strength Index (RSI)
- Exponential Moving Averages (EMAs)
As for the latter analysis tool, you can use about two versions such as the 50-day and 100-day EMAs.
Look Out for Psychological Levels
In trading, psychological levels are price points that appear in the form of round numbers. It may be the likes of 1350, 1200, or 200.
These figures tend to influence the support and resistance levels in the market. Based on the fact that humans are attracted to simplicity, traders often value whole numbers.
Incorporating this concept in your technical analysis will be helpful in identifying the ideal entry points in a trade.
Price Action Should be Part of Your Analysis
Simply put, price action refers to the movement of price over a certain period of time. It forms the foundation of an asset’s technical analysis. By using an apt price action strategy, you will accurately interpret reversals, breakouts, and other market trends.
Just like exiting a trade, entering the market should be a calculated move. The strategic entry into a trade increases your potential profits while lessening the probable risks.
All the aspects included in this article are crucial in determining when and where to enter a trade. However, it is important to note that the market prices and trends change in minutes or even seconds.
As such, time is of the essence. Conduct your fundamental and technical analysis promptly yet comprehensively!
Additionally, consistently following the relevant news will help you understand the market.