As I was trading and thinking over my trading plan, one thing that cropped up was whether my entries should be anticipatory or confirmatory.
Some of the considerations that I had were the following:
The Benefits of Each ‘Style’
- The benefit of anticipatory entries is that you enter earlier, your risk is tighter, but it is more difficult to catch the turn.
- The benefit of confirmatory entries is that you enter later, your risk is higher, but the probability of the trade going your way is higher.
If You Can Only Choose One….
- If you can only choose one style for all your trades: either anticipatory or confirmatory, which one would it be?
- Let’s assume that an anticipatory entry enters 2 ticks before a confirmatory entry. Now thinking from the perspective of doing anticipatory entries
- (a) If the exact turn was caught, we would make 2 more ticks
- (b) If we entered too early, we would lose 2 ticks per failed attempt.
- Since it is difficult to catch a turn, it is reasonable assume that (b) will have a higher probability of happening than (a). In that case, we would have negative expectancy.
- Hence a confirmatory entry approach should be adopted, if you can pick only one.
Analyzing the Trade-Off in Greater Depth
- So is it worth paying a higher risk for the supposed increased probability?
- In some choppy markets, or markets during choppy periods, confirmation counts for close to nothing. When the bulls and bears are fighting up and down every single bar, there is no added probability because a turn serves as no confirmation when it can very easily turn back all the way down in the next bar. In such a situation, we should actually make use of the chop to get a good risk/reward trade, so anticipatory entries should be used.
- However when you have no idea where a turn would occur, then confirmatory entries are good for such situations. In those situations, you need to see that turn to alert you that it is happening at that moment so that you are able to take a decent probability trade.
- Essentially there are situations where anticipatory entries should be used, and situations where confirmatory entries should be used.
Overcoming the Problem of Using Anticipatory Entries
- The problem with anticipatory entries is that it is difficult to have a good guess of what price level will turn the price. However, this problem is resolved when you have pull backs to prior support / resistance levels, or other significant levels. Hence anticipatory entries are terrific and should be used in those situations because you have a good location where you expect price to turn, and you benefit from the tighter risk.
- Anticipatory entries should be used for
- Pullbacks to prior support / resistance levels
- Choppy markets
- Confirmatory entries should be used for
- Retracement entries where you don’t know where or when the turn will be