What is better? Getting into a trade early to get a better reward:risk ratio and larger payouts or taking trades later with more confirmation and higher quality? This question comes up frequently in our pro area and also in my emails so I thought I’d share my view and explain what most people overlook.
What does early vs. late entry actually mean?
Let’s first be clear on what we mean when talking about early and late entries. Every pattern or method can always have an early or a late entry signal, depending on the style that you want to follow.
When we look at a Head and Shoulders pattern, for example, it means that a trader enters before the neckline is broken when he enters early. A trader with a late entry enters after the neckline is broken.
A trader using moving averages might use a smaller moving average to get earlier signals while a trader who wants to have later entries uses a higher period moving average – I talked about the best moving average setting before.
A support/resistance trader gets in right at the level for an early entry, while the later-entry trader waits for a confirmation signal around the levels.
This idea can be applied to any trading system, pattern or approach; there is always a way to get into a trade earlier or later by changing the rules slightly.
|Early Entry||Late Entry|
|Head and Shoulders||Before the neckline break||After the neckline break|
|Moving Averages||Small/low period MA||Higher period MA|
|Price Action Bars||Directly after the bar||When the bar is broken|
|Support/Resistance||Right at the level||After confirmation at the level|
|Generally||Mid-candle trade decisions||Wait for a candle close|
1. The early entry for more $$$$
The pros: Most traders are looking for the early entry because an early entry usually gives you a better payout ratio, your stop loss can be smaller and the potential profit is larger.
Also, it seems to be easier on the patience-aspect. You do not have to control your impatience when waiting for a trade or worry that a trade is taking off without you (no more FOMO?) because you get in faster. But is this really true?
The cons: This is the area most people overlook and then get into trouble. An early entry means that you usually have less confirmation and, thus, the trade has a lower winrate. The earlier the entry, the less signals you typically have and the higher the chance that it’s a false signal.
The problem here is that a low winrate can be tough on a trader’s emotions. Although the reward:risk ratio is usually higher, which means that your winners faster offset your losses, having many losses can be emotionally challenging. A trader must make sure that, even after a series of losses, he still follows his rules precisely, does not start doubting his system, takes every trade without fear and does not start over-trading.
A system with early entries does sound good on paper but when it comes to reality, it is usually too challenging for most traders and they quickly start deviating from the plan.
2. The late entry system for a more balanced approach
Pros: In my own trading, I prefer the later entry approach because it’s much easier on your emotions. You get much higher quality trades which means that the winrate is generally higher. This means less emotional problems compared to a system with a low winrate. We all know that emotions are the main problem area for most traders and the late entry approach can help you overcome many of those issues.
Cons: The downside is that you have to be more patient and wait for all the signals to occur. Also, the reward:risk ratio can be lower but the higher winrate counters this effect. The cons here are not that bad and the pros are well worth exploring the late entry style.
Final words: No better or worse
The most important part here is that you have to understand that there is no better or worse. Both approaches can be traded profitably potentially. But, a trader has to make sure that he understands his own personality and then finds the right approach for himself.
Are you OK with having a lower winrate? Can you deal with frequent losses and not start doubting your system? Can you then ride the winners longer to make up for the losses? Then the early entry system might be a good fit.
Or are you a more patient trader who can wait for the perfect trade and you don’t mind not having a lot of trades all the time? I get around 3 – 7 trades a week with the ‘late’ entry method which seems plenty for me. The late entry system, paired with my swing approach, is usually a better fit for people with a regular job as well.
System design is an important part of profitable trading and many traders skip this step and do not understand how their choice impacts their whole life as a trader and making the wrong decision can even ruin your chances of success when your system doesn’t match your personality. Even if you are not aware of it right now, you are already currently either trading the later entry or early entry (especially if you have FOMO) so I recommend that you spend a few moments auditing yourself and your trading style to get an idea where you are and where you want to be.
Leave a comment if you have questions and I’m happy to provide assistance 🙂