Australian Technical Analysts Association

Times are Changing

Part 3 : Entry Strategies

Do we need to change our entry strategies to suit the
different market dynamics?
Will the old moving average cross system work or
do we need something that is more aggressive but
also more selective?

By Neil Wrightson

11/07/2009 Newcastle ATAA - Ver. 1 1

 Times are Changing – Entry Strategies
Do we need to revisit our Entry Techniques?

In the 2003 to 2008 period we were in a long term trending

phase. The decision to enter the markets was easy and
did not require much in the way of talent or knowledge.

Various people took entries based on

News Items

BBQ Talk

and hopefully a little bit of TA

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 Times are Changing – Entry Strategies
Entries based on simple moving average cross over's
worked well during this period.

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 Times are Changing – Entry Strategies
In a trending environment we can suffer lots of small
losses because the big wins far outstrip the losses. So
30% winners and 70% losses in a trending environment
can still be quite profitable. 30% winners in a swing
environment (short term trend) will kill us, or send us into
the street.

So we need 50% winners or better, this is where the

Entry Strategy gives us (hopefully) a better edge.

Mind you, so far we are talking purely from a analytical

perspective. Having 70% losses has surely got to turn us
into blubbering cry babies and ultimately pull the plug on
what could turn into a winning system.

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 Times are Changing – Entry Strategies
I have read lots of books, watched many DVD’s/Movies and attended
all kinds of seminars. I feel that not enough time has been properly
spent on evaluating Entry Strategies.
Most times the Entry is blended into the Exit and the money
management .
So when back testing is performed and the system does not work,
where lies the fault?

Various well known professional figures tell us we could make money

on a coin toss. As long as we have appropriate money management
rules and exits we don’t need to worry about the entry.

A 50c coin will guide us.

Not for me!

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 Times are Changing – Entry Strategies
So in the Trading business, where does the Entry Strategy
fit into the equation?
Remembering back to our trading plan. It is only a part of
the big picture of trading.
In our trading plan, We have already decided what market
instrument we are going to trade i.e. EUR/USD, what
time frame we are going to trade, what position size we
can have, what our allowable risk is. All of this is decided
before an Entry Strategy is formulated.

The other decision we need to make is, what is the expected

number of bars our trade strategy is to run over?

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 Times are Changing – Entry Strategies
Remember that the number of bars we expect the trade to
last is different to the actual time base of the bars. We
could expect the trade to last for 10 bars but the bars
could be 5min, 4hr, 1day, 1week, etc.

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 Times are Changing – Entry Strategies
Remember that the number of bars we expect the trade to
last for is different to the actual time base of the bars.
We could expect the trade to last for 10 bars but the bars
could be 5min, 4hr, 1day, 1week, etc.

MONTHLY DAILY WEEKLY

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 Times are Changing – Entry Strategies
So before we develop an Entry Strategy, we have
a few important questions that need answering
first.

1. What is an Entry?
2. What do we expect from an Entry?
3. How do we measure if we have a good Entry?
4. What do we use as a measuring tape to see if the
Entry has merit?
5. When does the Entry stop and the Exit take over?

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 Times are Changing – Entry Strategies
1. What is an Entry ?
An entry is only a signal of when to enter the
market. It is a series of conditions that when
they are all satisfied gives us the entry signal
and entry price.

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 Times are Changing – Entry Strategies
2. What do we expect from an entry ?
An entry strategy is something that alerts us to
a possible thrust in the desired direction.
It is not the thing that finishes the trade or looks
after money management etc.

It hopefully gives us better than a 50/50 coin

toss.

Good initial thrusts, 60% of the time or better,

would be ideal.

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 Times are Changing – Entry Strategies
3. How do we measure a good entry ?
If you had to risk 1 dollar, wouldn’t you at least
want to make that dollar back. That is if I had to
pull a hundred dollars out of my wallet and risk
losing it, I want to at least make that much to
cover my emotional pain, cost of trading etc.
So I expect my Entry Strategy to at least make
me a R/R (Risk to Reward) ratio of 1:1.
R/R - The Distance from our entry point to our
Initial Stop is our Risk. Now add this value to
the entry price and we have our Reward.
This is a risk to reward ratio of 1:1.
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 Times are Changing – Entry Strategies

Reward

----------- Entry Point

Initial Risk

--------------------- Initial Stop

-------------------- Money Stop

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 Times are Changing – Entry Strategies
4. What do we use as a measuring tape to
see if the entry has merit ?
In Question 3 we defined a minimum return that we
would expect to make - a Risk to Reward ratio of 1:1.
We can use this as the units of measure on our
measuring tape.
The other key component for a measuring tape is time -
how quickly should the return be achieved? So now we
have a measuring tape.
So for a 10 bar trade, from the entry bar to the third bar,
we should have at least made our risk amount.
Remember that the entry gets us going in the desired
direction. It is the Exit that carries us to the profits.
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 Times are Changing – Entry Strategies
5. When does the Entry stop and the Exit take
over ?
This has two answers.
1. When the price reaches our required reward level,
the exit takes over and continues the trade.
2. Basically this should happen within a few bars of the entry. If
not then the Entry Strategy has failed it’s purpose and the exit
takes us out.
--- 1:1 R/R
----- Start Exit

Entry ----
Entry ---- ----- Start Exit

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 Times are Changing – Entry Strategies

MAE & MFE

By looking at the MAE (Maximum Adverse Excursion) and the MFE
(Maximum Favourable Excursion) over a series of trades, we can
determine if we indeed have a winning Entry Strategy.
Remember that we are determining how good the Entry is. Thus we
should be looking at the first few bars after the entry, to see if it is
thrusting in the desired direction.

So, to perform the Entry Strategy test, we need to have a time based
stop that exits the trade after 3 bars.

Remember - Our trading system may be targeting a period of 5..10 bars

but our Entry Strategy must get us going in the first few bars.

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 Times are Changing – Entry Strategies

MAE & MFE Definition

4000

1 2 3 3990
--- MFE

Entry -------

3980
--- MAE

MAE & MFE over a 3 bar period from trade Entry

MAE = Entry minus lowest low of the 3 bar period 3979.5-3985.5=6, MAE = -6
MFE = Entry plus highest high of the 3 bar period 3990-3985.5=4.5, MFE = 4.5
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 Times are Changing – Entry Strategies

Following Demonstration Charts

The following charts are the results from an actual
Entry Strategy.

The Entry Strategy is LONG only and consists of

multiple rules. Some of which consist of the
following criteria –
o Long period Moving Average for main trend direction
o Short period moving Average for initial setup
o Positive Pivot
o Larger volume

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 Daily FTSE100 01/04/2009..19/06/2009

Shaded area shows the period covering the following chart

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 Profit versus MAE & MFA

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 Sample trades from previous slide

Trade 2 Trade 4 Trade 7

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 Trade 9 – Exit grabs more profit

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 Profit verses MAE & MFE

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 Back Testing Results
All trades 47 (100 %) Winners 34 (72.34 %)
Net Profit 234.5 Total Profit 288.50
Avg. Profit/Loss (Expectancy
Expectancy)) 4.99 Avg. Profit 8.498
Avg. Bars Held 3.00
Avg. Profit/Loss 498.94%
Max. Consecutive 13
Avg. Bars Held 2.96 Largest win 19.50
# bars in largest win 3
Max. trade drawdown -13.50
Max. system drawdown -15.00
Max. system % drawdown -0.07 %
CAR/MaxDD
CAR/ MaxDD 73.45 Losers 13 (27.66 %)
Profit Factor 5.34 Total Loss -54.00
Avg. Loss -4.15
Risk--Reward Ratio
Risk 47.44
Avg. Bars Held 2.85
Ulcer Index 0.02 Max. Consecutive 4
Ulcer Performance Index 3.13 Largest loss -13.50
Sharpe Ratio of trades 92.69 # bars in largest loss 2

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 Times are Changing – Entry Strategies

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 FTSE100 01/04/2009..19/06/2009

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 Linda Bradford Raschke
 First Cross Buy
 - This is a pullback that is most often the first higher low that is formed after a base or consolidation period. The "pink' liline,
ne,
or 16 period MA of the 3/10 oscillator crosses ABOVE the zero line for the first time. The "orange line" or 3/10 oscillator pulls
back below zero as the price forms a higher low. First Cross refers to the fact that it is the first pullback in price after the pink
line or slow line has crossed from below zero to above zero.

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 Linda Bradford Raschke
 First Cross Sell
 - This setup coincides with the first lower high on a bar chart. The pink line, or 16-
16-
period MA of the 3/10 oscillator crosses below the zero line for the first time. The
setup then occurs on the next reaction back up when the 3/10 oscillator retraces back
above zero.

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 Linda Bradford Raschke
 Turtle Soup Tests
 - This is one of the trade setups that was published in the Street Smarts book. The
trade occurs when the market makes a failure test of a previous 20-20-day high or low.
The name of this trade came from Richard Dennis's "Turtle" traders, who entered
trend following systems on breakouts of 20- 20-day highs and lows. Test of previous key
swing highs and lows are important psychological pivot points for the markets. At
point 1, a Turtle Soup Buy is given in INTC as it makes a successful test of a
previous 20-
20-day low. At point 2, there is a Turtle Soup Sell.

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 Stuart Wrightson
 Bull and Bear Trap
 - These are false breakouts from an extended trading range. Point 1 was a Bear
Trap and Point 2 obviously trapped the bulls. This is unusual to see two opposite
examples so close to each other. When there is a false breakout at one end of and
extended range, we then look for the market to trade to the opposite end of the
range.

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 In Conclusion
These days the catch phrase seems to be either Money
Management and or Exit Strategies.
Obviously these are extremely important areas of trading.
BUT

I hope my insight into Entry Strategies as an individual

component of the Trading System and the testing of this
component has been useful and interesting and will help
thrust you towards your profits.
Entry Strategies
By Neil Wrightson
[email protected]

9/08/2009 Newcastle ATAA - Ver. 1 31

 AmiBroker Code for Entry
// Generate a Buy Signal (Entry)
EntSigSwt =
(PivotRibbon(
PivotRibbon(EntRibbon
EntRibbon)==1)
)==1)
AND ((PivotHist
((PivotHist((EntSMAPeriods,EntPivotPeriods
EntSMAPeriods,EntPivotPeriods)) > 0) OR
((
((PivotHist
PivotHist((EntSMAPeriods,EntPivotPeriods
EntSMAPeriods,EntPivotPeriods)) >
Ref(PivotHist
Ref( PivotHist((EntSMAPeriods,EntPivotPeriods
EntSMAPeriods,EntPivotPeriods), ),--1))))
AND V > Ref(V,-
Ref(V,-1)
AND C > (H+L)/2
AND MA(Close,TrendFilter
MA(Close,TrendFilter)) > Ref(MA(
Ref(MA(Close,TrendFilter
Close,TrendFilter), ),--1)
AND (TimeNum
(TimeNum() () > 080000) AND ((TimeNum
TimeNum()
() < 120000)

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