In trading you may have heard the term, “Second Entry,” but you may not be quite familiar with its meaning. The term means that you have a second opportunity to take advantage of a particular trading setup, usually a chart pattern or other form of technical analysis pattern.
An example of a second entry would be if a stock was in a tight range for a reasonable time period and broke out of that range to the upside. If the fictional stock “ABCDE” was trading between $43.25 and $45.50 for the last 3 weeks and then a trade took place at $45.60, many day traders and “breakout traders” would start to buy the stock. The stock could run up to $46.00 or even higher, but after the buying frenzy subsided in this example the stock’s price dropped BELOW the previous high of $45.50. Everyone who bought above $45.50 and held the stock is now holding a losing position, so many of those buyers would start selling to reduce the impact of their losses.
However the stock may reassert itself and begin its climb back up. If the stock’s price dropped below the previous high of $45.50 for only a short period (a few bars on a chart, which could mean a few days on a daily chart or a few minutes on an intraday chart), “second entry” traders would purchase the stock when the price goes above $45.50. The psychology behind this strategy is that the short-term buyers and “weak hands” have higher odds of having been eliminated, so they feel that the “true” breakout can begin.
Many trend traders restrict their trades to those which failed the first time but quickly reasserted themselves to resume the direction of the initial move. As always, back-test any technical strategies, apply proper money & risk management procedures, and maintain proper trading psychology. Restricting your trades to second entries-only opportunities are applicable to swing traders, longer term traders, and day traders.
All standard risk, investing, trading, day trading, and financial services disclaimers apply to this article.
Source by Matthew Mc Dermott