It's All About Basis

Every Tuesday Chuck releases a new Trader Tip video on YouTube. This week we will discuss Great entries, and how they really epitomize the adage that patience is a virtue. We are going to finish with Entries. The entry (basis) is part of the 5 components of trading.

You can read the episode transcript below or watch the video that follows.
If you have any questions, please reach out to us. We look forward to being a continued part of your trading education!

It’s all about basis. It’s all about basis. Today we’re going to continue on our discussions about the five components of trading.

So just as a review, the five components of trading ranked by their order of importance:

1. Psychology

2. Money Management, or Position sizing

3. Market Selection

4. Exits

5. Today we’re going to finish with entries.

Now the trading community at large continues to focus on market selection in entries. what stock do I buy? Is this a good time to buy the market? neglecting psychology, neglecting money management and neglecting exits. But today we’re going to talk about entries. Number five.

When we talk about entries, it’s important to understand that entries are psychological entries can have positive or negative reversion, and entries are the least important component of trading, but they’re still really important. Great entries create a low cost basis, a low price from which we make our trade, from where we are long or short. When we have a great entry, we create a low cost basis, and from that low cost basis, we get psychological strength that allows us to be strong to hold through the inevitable adverse moves that come. We also have flexibility for superior trade management. Because we bought low, we have lots of options of things we can do around our trade, to enhance the return to enhance the reward.

Great entries, they really epitomize the adage that patience is a virtue.

The best entries are just waiting, and waiting and waiting for the right moment and bam, strike.

Let’s contrast that with poor entries. Poor entries create a high cost basis. This high cost basis makes us fragile, it makes us psychologically weak, and we have to deal with strain. Anytime we have adverse moves, it’s gonna be really hard to hold on. We don’t like losses. So when we start to experience all these losses, we’re going to want to get out. Where when we buy really well we buy low basis, we don’t really experience losses. Because we pay high, because our basis is high, we have a lack of flexibility in managing our positions, because anything we do kind of locks in a loss or kind of takes away our potential reward.

Poor entries are usually caused by FOMO Fear Of Missing Out.

Somebody gets an idea, they don’t want to miss it. So they jump in. They jump in at a really bad price, then they have to deal with all kinds of pain. A lot of times a trade doesn’t work.

Compare the two.

A great entry makes you psychologically strong, and allows you to hold through. Having very low heat, and it’s set up by patience. Poor entries create high basis which introduce psychological strain, a lack of flexibility and they’re caused by FOMO. Fear Of Missing Out.

Entries can also have positive reversion or negative reversion.

Positive reversion is when you buy under fair value. This reduces our risk and by reducing our risk, it increases our reward to risk ratio. We have a higher likelihood of being wrong when we buy low. But that often gets compensated for by having much better reward to risk ratios. An example might be buying a pullback to the 10 day moving average. So here’s an example of a positive reversion where we buy under fair value. In this example, we’re buying a pullback to the Keltner one channel. Okay positive K1. So we’re enter enter able to enter a 109 44 with a 109 20 stop risking just 24 tics. By being able to buy low, we’re able to profit for 69 tics for 2.875 R trade and our capture rate we capture the majority of the move.

Let’s contrast that with negative reversion entries.

In a negative reversion entry, we buy over a fair value we pay up. This increases our risk, and because our risk is increased, it decreases our reward to risk ratio.

Now buying high sometimes gives us a higher likelihood that the trade will work, because we’re buying a new high. An example this would be buying a breakout of 20 day highs. So here’s the same trade but now we’re buying a breakout, we’re buying exceeding K2 positive k2 ban. So here we’re buying at 109 53 with a 109 stop, now we’re risking 43 tics. Where the positive reversion entry we were only risking 24 tics. Our risk is almost twice as big. So as a result, we get out for only a 25 take profit which ends up being only .58R and we only capture 38 and a half percent of that move. We didn’t address the exits here but just on the entry buying low improves our reward to risk ratio and improves our R.

When we recap the importance of entries, entries, our psychological, low cost basis creates psychological strength and flexibility to manage the position entries can be positive or negative reversion and positive reversion entries create psychological strengths through superior reward to risk ratios.

So my question for you is what are your entries like?

Do you just jump in, or are you incredibly patient?

Do you buy high or do you buy low?

Have you thought about this?

Do you know why use the entries you use?

They’re the least important but they are important because they set you up to win. So think about this in your own trading and I will see you next Tuesday. Remember, stay tuned every Tuesday for additional webinars such as this one where I will take you through different ways to think about trading that will take your performance to an elite level.

See you next Tuesday. Bye.

~Chuck Whitman