Of all the white lies we always hear -- “it’s not you it’s me”, “size doesn’t matter”, “the food is interesting” -- none is more pernicious than the old trading maxim “entries don’t matter, only exits do.”
Could. Not. Be. A. Bigger. Bull-t. Statement. If it tried.
Here is the truth about trading. Exits are FIXED. You never, ever, ever know if the move will go 10 pips or 100 pips or a 1000 pips in your direction. So you chose the highest probability exit for the time frame you operate on and YOU STICK TO IT. All those idiotic tricks you see about “trailing your exits” never work in real life because prices always slide to your break even points and all those huge profits on the chart are mostly an illusion. So if you want to be a pro at this you fix your exits to your time frame. I, for example, take profits at 10 pips on my day trades. Kathy looks for 70-80 pips on her swing trades. We do this over and over and over -- because like all professionals we seek to replicate best practices.
Entries on the other hand are everything. I spend all of my time working and refining my entries. In my trading room we call it “posture”. The better your entry, the stronger your posture -- the easier it is to manage the trade to profit.
Did you know that one of the greatest intra day LONG trades in the history of the stock market was during the 1987 market crash? I am old enough to actually remember it as I sat mesmerized staring at my Quotron at 60 Broad Street in the old Drexel Burnham Lambert headquarters. That day -- the greatest percent decline day in the history of the market -- stocks rallied more that 10% off their lows right after lunch before fading once again into the close. If you bought that bottom as some futures traders in Chicago managed to do, you made a fortune on a day when everyone else was losing their life’s savings.
Entries of course are notoriously difficult. It’s hard to time the price to one or two ticks of a turn. That’s why as a trader you ultimately resort to probabilities and usually do an array of entries in order to get a blended price as close to the turn as possible. That little trick works in investing too. There is simply no better way to make money in the long run that to dollar cost average into an index. That strategy will beat any hedge fund return over a decade or more of application.
To give you an idea of the power of blended entries, I downloaded a random set of daily Dow Jones Industrial Average data from Google. It just so happened that I pulled down 18 months of closes from start of 2008 to mid year 2009. So I ran a little Google sheets experiment. There were 125 trading days in 2009. If I invested 125,000 on Jan 2, 2009 by mid year my stake was worth about $120,000 as the DJIA slipped a bit. If, on the other hand, I invested 1000 dollars each day, by mid 2009 my $125,000 stake was worth $130,000.
That was nice, but it was truly mind blowing to run the numbers through 2008 -- a year when the Dow collapsed from about 13,000 to about 8,500. There were 253 trading days in 2008 so $253,000 invested at the start of the year withered to just $165,000 by the end of it. Buying 1000 dollars at a time I still lost money, but considerably less -- my stake declined to $200,000. Overall in the 18 month period from 2008 to mid 2009 there were 378 trading days. If I poured all that money in at the start of 2008 my $378,000 investment would have declined to less than $240,000 after 18 months of being in the market.
However buying 1000 dollars each day that same $378,000 stake was worth $325,000.
Now you tell me -- which investor would have the mental strength to stay in equities to take advantage of one of the greatest bull markets in history that was to follow -- the guy with 85% of his money left or the guy with 63% of his funds?
Don’t ever tell me entries don’t matter.