Entries are the lifeblood of a trade.
So, it’s not surprising LottoX traders ask the most questions about this topic.
The number one question: What do I do when I miss my entry?
I could cop out and just say ‘wait for it to come back.’
But that wouldn’t do it justice.
I want to take you beneath the covers to truly understand this question
There’s a lot more to it than you see on the surface.
Just reading it brings up all sorts of emotions because we all have stories around this topic.
The trade you missed that ran for days.
The trade you chased that became your biggest loss of the season.
So, why is it so difficult to answer such a simple question?
It all starts with the psychology of the question itself.
Read the question again:
What do I do when I miss my entry?
The question implies one or more of the following:
- You don’t have a well-defined trading plan that clearly marks entries and exits
- You don’t trust your analysis
- You feel like you’re always ‘missing out’ on the trade (AKA FOMO)
By just asking the question, you’re admitting that you want an answer different from what you already know to be true.
So let’s move past that and focus instead on the strategic implications of this question.
Don’t chase your entry
I promise not to make this a cop-out. Rather, I’m going to show you mathematically why entries are critical.
First, let me review a concept called Expected Value.
Expected Value is what a trade should produce on average over multiple instances.
Easy example, a coin flip.
If I flip a coin, there’s a 50% chance of heads or tails. If I bet $1 to make $1, I breakeven over time.
But, if I bet more than $1 to make $1, I lose money over time.
The formula for Expected Value is as follows:
Expected Value = (% chance of winning x profit potential) – (% chance of losing x loss potential)
What I want you to take away from this is the following: The lower your risk, the higher your expected value
That means if you get a better entry, your expected value increases because both your risk declines and your reward increases assuming you keep your target the same.
When you chase your entry, every penny you move higher is a double whammy for you. Both your reward declines and your risk increases.
Moral of the story – math says don’t chase your entry.
But don’t automatically take that pullback
What happens when the stock makes its way back to the entry price – should I jump on board then?
You see, between when it took off on me and when it came back, a lot may change.
For example, if a squeeze already fired, I won’t enter the trade because it’s no longer valid.
Here’s an example with Carvana (CVNA).
CVNA 78-Minute Chart
Say I missed my entry and didn’t see this chart until August 26th. Even if it comes back to my entry price I don’t want this trade.
Why? Because the squeeze already fired so the setup is no longer valid.
Another problem that can happen is what’s known as adverse selection.
Adverse selection means that the very fact that you miss the entry and take the pullback may completely change the outcome of the trade.
To see whether this is true, you need to log your trades in a journal. Then look at how the trades from pullbacks perform against those that you nail the entry.
If the two aren’t roughly the same, then by waiting for the pullback, you’re lowering your chances of success.
Good news is once you realize that, you can cut it out and do even better!
Set alerts ahead of time
Yes, it sounds simple enough. But you’d be surprised how many people don’t bother with this simple step.
There is one trick I’ll add to it that you may not know.
Set the alerts to go off before the price hits your level.
True, sometimes stocks can whip around and it won’t matter.
But at least you gave yourself a shot to get to the chart and see whether you wanted to take the trade or not.
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