“Victorious warriors win first and then go to war, while defeated warriors go to war and then seek to win.” ~Sun Tzu
Newer traders like to focus on the trade set-up, the entry point. They’re looking for the next big stock, and they want in at just the right price. That seems logical. The entry price is an obvious place to start; the beginning of a trade!
Or is it?
The hard truth is that the entry signal is about a dozen steps into the trading process, not the first one. Traders tend to become preoccupied with it because it’s the most hopeful stage of the trade cycle.
In the book The Complete Turtle Trader, Michael Covel recounts how the famed trader Richard Dennis drove this home to his students:
“Our research indicated that liquidations are vastly more important than initiations. If you initiate purely randomly, you do surprisingly well with a good liquidation criterion.
Dennis actually challenged the Turtles to randomly enter the market and then manage their trades after getting in. That was a real Zen moment for the Turtles. If they applied appropriate risk management, they could handle the worst that came down the pike once they were in any trade.
Profit or loss is determined at the trade exit, not entry. Too many traders fixate on finding The ‘Great Set-Up’, instead of all the steps that come before clicking buy.
Where should a trader focus his time and energy?
Trade performance is impacted more by the development of an exit strategy and a risk management process than by picking the perfect entry point. A robust entry signal will give an added edge, but it’s only that – an edge. If a trader has all the elements of a trading plan in place before he enters a trade, then he has won before going to war. The trader with a plan, patience and discipline is unstoppable.
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