It is all important imo. Entry is just the start of a chain of events that constitute a trade. It is very important but no more important than stops and targets. I don't believe can have an edge without a good entry but only way to fully exploit that edge in a successful way you must have good exits. All works together for your success or demise if don't do it right.
"The day I became a winning trader was the day it became boring. Daily losses no longer bother me and daily wins no longer excited me. Took years of pain and busting a few accounts before finally got my mind right. I survived the darkness within and now just chillax and let my black box do the work."
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When looking at trade efficiencies, both entry efficiency, exit efficiency and overall efficiency...
Entries will deterimine the maximum amount of profit you CAN possibly make on a given trade. Exits will determine how much of that potential profit you squeeze out.
Marginal or lackluster entries can be masked by good exits....usually, the market will show you runups and drawdowns (in some amount) for just about every trade (unless you're ultra scalping or HFT). Your ability to exit at a point of profit is usually easier than trying to figure out a better edge/entry point.
I guess the easiest way to explain it is that it's MUCH easier to wring out profits by getting good at exits, which is why most people do and should focus on exits. There's a much larger spectrum and distribution to your profits when considering exits alone.
Entries are tough to adjust and have any REAL appreciable impact in the entry efficiency. When you trial to dial in your edge, usually, it comes at a cost (increase sensitivity and it usually includes false signals, decrease sensistivity and it will weed out some losers, but also some winners too).
Entry edge is very important, but because most traders are lucky to find a 5 to 10% edge equivalent, they focus more on exits where there might be a 20-40% swing in how much profit you're able to make.
"A dumb man never learns. A smart man learns from his own failure and success. But a wise man learns from the failure and success of others."
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How important is entry price?
There may be a perfect "entry" price but I am not sure how you would know what it is or how important it was until after the fact. "Wow great entry" or "whoa my entry stinks." We have all said that as the trade develops. How much of it was under our control?
Entry price importance also would be highly individualistic and depend on risk profile, trade style, etc. The overall risk to you personally on the trade is what you can control and all that matters. This includes your exit, your size, your broker, your backup power or plans, and any other factors you control. It matters how the particular trade/bet affects you only. Everyone will be different in this regard. To say the entry is very important may imply that you have a certain amount of predictive ability. You may - and you could work on developing this - but that is certainly not the part that you have the most control over.
2- Exposures to X Should Not Be Confused With Knowledge About X --and They Are
Exposure, not knowledge.
Next we go into a deeper set of problems less obvious in the discourse, that have a severe philosophical
consequence. The confusion is as follows. Take X a random or nonrandom variable, and F(X) the exposure, payoff, the effect of X on you, the end bottom line. (To be technical, X is higher dimensions, but let's assume for the sake of the examples in the introduction that it is a simple one-dimensional variable).
X is arsenic, coffee, or aspirin, F(X) is the response of your body to the ingestion of arsenic, coffee, or aspirin (obviously the dose response is extremely nonlinear making F complicated).
X can be a shock hitting a coffee cup, F(X) is the response in change in value of the coffee cup and its utility for you.
X is a “prediction”, F(X) is how it affects me.
X can be rain, F(X) is the effect of rain on you.
X is unemployment in Senegal, F 1 (X) is the effect on the bottom line of the IMF, and F 2 (X) is the effect on your grandmother (which I assume is minimal).
X can be a stock price, but you own an option on it, so F(X) is your exposure an option value for X, or, even more complicated the utility of the exposure to the option value.
X can be changes in wealth, F(X) the convex-concave value function of Kahneman-Tversky, how these “affect” you. One can see that F(X) is vastly more stable or robust than X.
Limitations of knowledge.
What is crucial, our limitations of knowledge apply to X not necessarily to F(X). We have no control over X, some
control over F(X). In some cases a very, very large control over F(X).
My point is that we should not confuse “knowledge” of X with that of F(X), the effect of the payoff, an error often made, actually, almost always made. And “knowledge of X” does not crudely translate in knowledge of F(X); F(X) is the full package, the beginning and end package.
F(X) needs to be computed in a completely different manner, as we will see, using all possible values of X. This seems naive, but people do, as something is lost in the translation.
My irritation with the treatment of the Black Swan problem is as follows: people focus on X (“predicting X”). My point although we do not understand X, we can deal with it by working on F which we can understand, while others work on predicting X which we can’t because small probabilities are incomputable, particularly in “fat tailed” domains. F(X) is how the end result affects you.
The probability distribution of F(X) is markedly different from that of X, particularly when F(X) is nonlinear. We need a nonlinear transformation of the distribution of X to get F(X). We had to wait until 1964 to get a paper on “convex transformations of random variables”, Van Zwet (1964).
Bad news: F is almost always nonlinear.
The central point about what to understand: When F(X) is convex, say as in trial and error, or with an option, we do not need to understand X as much as our exposure to H. Simply the statistical properties of X are swamped by those of H. That's the point of Antifragility in which exposure is more important than the naive notion of "knowledge", that is, understanding X.
“Be who you are and say what you feel because those who mind don't matter and those who matter don't mind.” - Dr. Seuss
Yes there are certainly better entries than others, But more important IMO Is that you're in a steady trend with your stop placed just below the previous swing low with a significant expectancy. I Think this strategy usually gives sufficient leeway to catch a move and or determine if you're indeed wrong with out having to worry so much about having a favorite place to get chopped apart.
Could you please explain me in a human language what the error of Fukushima was? Sounds interesting, the article, except I don't understand a word haha.
Could you please expand on that? Is there an article I can read about market orders dominating on short side. I mean, it makes sense that it should be that way, but I have never thought about it. Market crashes are basically market orders hitting the market. Really never thought about it. Good to know.
You were talking about taking profits too, but I cant relate to that one. I would like to hear more, please!
Last edited by ReaM; September 3rd, 2012 at 04:01 PM.