How to identify entry and exit points in trading?

Trading, whether of stocks, currencies, commodities, options or contracts, is surely much easier when done with longer time horizons.

Yet this does not mean there aren’t advantages, as well as profits to be had, in intraday trading, also known colloquially as “day trading”. This style of trading involves entering and exiting positions in the same trading session.

Traders identify assets to trade with a sufficient amount of volatility for profitable price swings, and then use tools of technical analysis to try to gauge the entry and exit points. Day trading is often left to seasoned investors, but experiencing this style of trading for oneself offers a plethora of experience for investors of all levels. Here are some tools for finding entry and exit points for positions.

Once assets, usually stocks, have been selected as good candidates for trading, short-term traders should try to find levels of support and resistance in the price range a given asset is trading in.

Levels of support and resistance are like invisible boundaries that hem in the movement of a price, which the price is very reluctant to go above or beneath. These levels then often indicate good entry or exit points when the price touches them, either to buy when a low support is hit, or to sell (or short sell) when high resistance is met. The best times to look for these levels are during the busiest times of the trading day, usually the first and last hours of the trading session.

Sometimes traders will sense that beyond the mere boundaries of support and resistance, an asset’s price is moving or trending in a particular direction, either in an uptrend or in a downtrend.

Trendlines are tools that roughly smooth out price movements by providing lines to more obviously show their direction. When there’s a series of progressively lower highs (downtrend) or higher lows (uptrend), the trendline will even act as a resistance or support line in the price’s trending journey.

By pinpointing the trend, traders then have the option to try and “trade the trend”, short-selling at a high in the downtrend or buying/adding at a low in the uptrend. Certain assets may be better than others for each trend:

• stronger performing stocks for uptrends;
• weaker performing stocks for downtrends.

Channels are pairs of trendlines that run parallel to one another, acting as support and resistance for the price of an asset like railings on a staircase. They can be found when there are repeatedly consistent highs and lows on two trending lines.

Traders then have a decision to make:

• they can enter and exit at the lows and highs, relying on the price to keep careening between the channel lines;
• they can wait for the price to break through one of the lines. Often this “breakout” will indicate a new uptrend rally or a new downtrend route. Either way, entering a position at the breakout point and then exiting when the trend becomes established can be a good strategy for the patient trader.

There are many other tools that can be learned to supplement the tools discussed above. They include a number of chart patterns, including candlesticks, flags, pennants, triangles, wedges, to say nothing of a whole slew of technical analysis indicators that can be learned as well. When using all of these, however, there are some principles that should be followed to optimise their effectiveness and time entry and exit points correctly:

1. Establish stop-losses. Based on the price movement of an asset, once a position is entered, the trader should make sure to set a stop-loss order to exit the position if the asset’s price goes in the opposite of the intended direction. They should agree to a small percentage (like 1-5%, or more if trading options or volatile assets), and if the asset’s price goes against their position by that much, they should immediately exit.
2. Take profits. This is just as important as the stop-losses. Once a trader has entered the position and accrued profits, they should agree to exit the position once those profits hit a percentage of the asset’s price (again, like 1-5%, or more if trading options or volatile assets). Both practices of exiting by percentage will keep the trader disciplined and mitigate the fear and greed that can hurt traders in the long run.
3. Pay attention to increases and decreases in volume and volatility. Spikes in these will mean new ranges and new trends may be beginning to be established. Clinging to past patterns after changes in these two areas is just trading on wishful thinking.

The utilisation of each of these techniques and the following of these principles requires one thing more than anything else, especially for entry and exit strategies: discipline. Without discipline, a trader’s judgment will become clouded and subjective, and their strategy will be inconsistent and suffer. With it, a trader can hone their strategies to be a truly effective force in the market.