There are many opinions out there on if the entry or the exit is more important in trading. In reality, it’s all important.
You need to have a complete system that has a statistical advantage, before putting any significant money behind it. In addition, you have a winning mindset and be in peak physical/mental condition.
But if we are going to only talk about entries and exits, then I wholeheartedly believe that the entry is much more important than the exit.
Here’s why…
Why People Say Exits Are More Important
Some say that monkeys throwing darts to pick stocks will do better than the average fund manager. This illustrates the point that exits are much more important.
There are educators who do exercises like this to show the importance of optimizing exits. While the educators are making a very important point, some developing traders might misinterpret this to mean that exits are more important than the entry.
Finally, there are studies that show that a random entries can show profitable results. One example is in the book Trade Your Way to Financial Freedom.
In that book, an experiment done by Tom Bosso showed that using a “trading system” that involved flipping a coin (for short or long), was always profitable at the end of each test. This is an excellent illustration of how important the exit is in trading.
But that is all theory. Let’s take a look at why I believe that great entries will help a lot more than great exits, in real world trading.
Why the Trade Entry is More Important Than the Exit
The best place to start is at the beginning. Nothing happens to your trading account until you open a trade.
You will never lose money if you don’t open a trade.
Yeah, duh.
I am only saying this because I think that it can be too easy to take this for granted. Here are a few other key things to consider about entering a trade.
Entries are Psychological
The very act of deciding to open a trade is extremely important. If you are not in the right frame of mind or you don’t stick to your plan, it is very likely that you will end up with a losing trade.
This can be overlooked when we examine the results of purely mechanical backtests. So deciding to put your money on the line all starts with your psychological state at the time the trade is entered.
Of course, this is not the case if you have a purely mechanical trading system. But for traders who manually enter trades, the psychological aspect cannot be ignored.
A Higher Probability of Profit
When you have a good entry, your probability of success goes up significantly. For example, here is a trade that I entered on a limit order.
The blue line is my entry point, right above the previous high. I set a 20 pips stop (red line) and set a 2R profit target (green line).
As you can see, this was a strong uptrend and there wasn’t a lot of room to profit on this trade. However, I was able to squeeze 2R out of the trade, just by having a great entry.
If I had waited for the Outside Bar to form, it would have been too late. The trade would have been stopped out.
The green arrow shows the initial entry.
Better Entries Mean More Profits
Here are two Pin Bar setups, which one has the higher profit potential? This one…
…or this one?
Obviously, the first Pin Bar has more potential because there is more room to the downside, whereas the second chart is already very close to a major support level.
So if you decide to take a trade on the first chart, your chances of getting multiple R out of it is much greater. Again it all comes down you which trade you choose to enter.
Consider Opportunity Cost
Finally, by having a solid entry, you are more likely to reach your profit target faster. Or your stop loss. This leaves your mental and monetary capital available to look for another opportunity.
However, if you have a sub-par entry and you have to wait days or weeks to see the result, you are not making the best use of your time. Sure, some killer trades will take a little time to materialize.
But having the best possible entry will help you increase the number of trades that you can take, and therefore multiply your edge.
Beware of Over Optimizing
Of course, the danger of focusing too much on the entry can lead to over optimization and trying to set your stop too tight. So be sure that you aren’t trying to set your stop too tight.
This all comes down to backtesting and figuring out what works best for your trading style.
Conclusion
Your trade exit is still important and should be optimized. Your risk management is also very important.
It’s all important.
However, if you can focus on only entering trades that have the best potential, being focused and optimizing your technical entry, you will make it much, much easier to profit consistently.
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