“Question Everything!” is a good mantra. It creates curiosity, fosters creativity, and leads to discovery. I’ve been thinking about (and questioning) trigger points. These are the price levels traders choose to use as the entry for their trades. Some people live and die by the entry. It can make or break my trade, they reason. Thus, they seek the perfect combination of math, logic, and confirmation to arrive at the optimal price for the trigger pull.
This is all well and good. And necessary if you enter your trades all at once – which I daresay is darn near every trader. But I wonder about alternate entry methods. For example, could we craft a trading approach that makes the timing of your entry irrelevant?
This is what passive investors do, isn’t it? Think about your friends that sock money into the market with every paycheck. Do they worry about the timing of their entry? Do they fret over price charts just before pay-day to ensure their looming purchase coincides with a great buy point?
Because when you invest with every single paycheck, your entry prices become irrelevant. If prices fall after this week’s purchase, who cares? That means every dollar invested from my next paycheck will buy a bit more than this go around. By splitting the entry into hundreds to thousands of individual deposits, the importance of each trigger pull becomes negligible.
Now, as an active trader, I have to acknowledge a tiny bit of jealousy. In the world of active trading, the Entry Point Monster terrorizes the countryside making traders wonder when they’ll become his next victim.
I’ve visited the passive investing realm. And their Entry Point Monster is powerless.
If only we could combine the best of both worlds! From active trading, we’ll take the wonders of technical analysis, and from passive investing, we’ll take the idea of scaling-in over time. Think of it. We will do our best in identifying the best charts, the best setups, and the best entry points. But, then we’ll borrow from our passive brethren and buy incrementally to diversify by time and price as a way of easing the pressure of having to nail the entry point.
No longer will you sweat as your battle-scarred finger hovers over the buy button. No longer will you curse the whipsaw monster as he rudely triggers your entry order before hightailing it in the other direction.
When I learned how to view buying and selling as a process instead of an event – my trading changed forever.
As the power of your entry point diminishes, the importance of your management grows. Indeed, whether you reap profits or pain comes down solely to your management abilities. And that, dear readers, is a good thing. Because it’s much easier to get the management right than to nail the perfect entry.
Buying over time and price is known as scaling-in. Whether you split your bet into two tiers or twenty, know this: The more tiers you have, the less entry point matters. The fewer tiers you have, the more it matters. Personally, I like three. But I know of a successful trader that uses upwards of twenty.
Today I laid down the theory. Next time I’ll share an example.
Financial freedom is a journey
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