Identifying a Trade Entry
Trading is like going to a party. Some people thrive on an attention grabbing entrance while others are more comfortable arriving in a low key way. Entries may be memorable but ultimately, it’s the time you spend and how it ends that leaves you feeling good or bad.
The best entry into a trade with uptrend potential is a preference too and it’s different for every trader. By using the GMMA indicator, a trader may choose to be aggressive, cautious or conservative with their entry as a trend accumulates. This is a concept presented by Daryl Guppy in previous webinars.
In Figure 1, an aggressive trader who doesn’t mind high risk might enter a trade at ‘A’ as marked. The GMMA groups are in the order of a downtrend with the blue lines of the short-term GMMA sitting under the red lines of the long-term GMMA. Compression has occurred and a twist of the short-GMMA upwards has the potential of becoming the start of an uptrend.
A cautious trader, who prefers a little more certainty enters as close as possible to the beginning of a trend at point ‘B’. At this stage, the short-term GMMA has started to expand out slightly as it passes over the long-term GMMA. Trader activity is picking up in this stock.
A conservative trader who wants even more certainty of a trend in place, may prefer the entries marked at ‘C’. At the first green arrow, the short-term GMMA lines have separated indicating the support from traders of the emerging uptrend. Some traders may prefer an entry at the second green arrow further along the trend. At this part of the chart, we see the moving average lines of the short-term GMMA and the long-term GMMA are widely separated. Both traders and investors are supportive of the uptrend in place for this stock.
Let’s analyse a stock on the ASX.
On the following Grange Resources (GRR) chart, I identify 3 possible ways to enter into a potential trend.
In Figure 2, we have the following set-ups:
Entry A Price had already fallen down through the red lines of the long-term GMMA and was beginning to rise back up. A trader who doesn’t mind a risky entry anticipates further price movements higher and enters as marked at the red arrow. The short-term GMMA had turned over, rising towards the top of the long-term GMMA.
Entry B Sometimes price doesn’t go in the desired direction as seen by the price action after Entry A. The short-term GMMA failed to rise above the long-term GMMA.
A trader who is a little more cautious makes a trade entry in the area marked ‘B’. Price has risen above both the short-term and the long-term GMMA. As the moving average lines of the short-term GMMA have started to separate, they have also risen above the long-term GMMA and sit in the order of an uptrend.
Entry C Price didn’t take off immediately after Entry B.
Another possible entry point into GRR is in the area ‘C’ where there is a more obvious expansion of the lines of both the short-term and long-term GMMA groups.
A more conservative trader may enter as marked by the green arrow. Of course, there will be other traders who still consider the entry at 'C' to be a risky one. Each of the stages described may mean something else for another trader. This is acceptable as everyone has a different risk tolerance and perception of risk.
There are many other ways to analyse the GMMA for an entry besides those listed above but unfortunately it is beyond the scope of this article.
In Figure 3, we have marked 3 entry set up positions for 3 different traders, entering into the developing uptrend. In this case, there was little difference in the entry prices for GRR though sometimes the difference in entry price can make a noticeable impact on the final profit.
On this chart of GRR, an exit from the trade after achieving a target profit or a trigger of the ATR stop loss at $0.77, results in a profit for all 3 traders. Holding on to the position longer results in a drawdown of all the accumulated profits and a loss as price trends down to the original entry level and beyond.
The GMMA is useful for finding entry points into a potential, developing or existing trend. It is not a stand-alone indicator and you may wish to use other indicators for a more precise entry point. Just like the party scenario, the entry is not as important as what you did there and how it ends.