Entry Types For Momentum vs Rangebound Plays

Merritt BlackFutures, General Comments, market structure, Technical Plays, Trading Conversations

Last Friday we had a great talk, with Brexit fresh off the press, during our weekly Trading Conversations webinar last Friday. As usual, we covered a wide range of things such as using context, how to adjust your trading to handle volatility, and more! Not a bad way to wrap up your trading week with some open trading conversation.

One highlight from the webinar was around adjusting your entry type to fit the trading style being deployed. Specifically, we discussed using passive vs aggressive entries for rangebound vs momentum conditions.

There are caveats to just about any blanket “trading rule”, but in general I use more limit entries for rangebound markets, and market/sweep entries for momentum plays.

What this means is that if a stock is rangebound between $22 and $22.50, and we’re looking to buy the bottom of the range, I typically like to use buy limit orders placed near the lower end of the range to be very stingy on what price I buy from. Alternatively, let’s say a stock is trending higher aggressively, with fresh news, and has no technical resistance nearby. In this case, I’m less price sensitive and will hop on board favorable momentum with the trend with a market or sweep order.

There are a few reasons for these approaches. One obvious one is that in a momentum market, you can easily get left behind with no fill if you are too stingy with resting limit orders. Now there are some traders here in NYC that will use limit orders to get filled on pullbacks in a trend, and that is certainly fine to do. The downside to that style is that you may not get more favorable momentum (the pullback can just keep on pulling back!) and those entries can look pretty bad when that happens. I prefer to read the tape, see actual participants, the speed of the ticks, how much volume is trading, if the volume is on the bid or the ask, etc to help me see some clue that we’re at a turning point. Obviously even with those tools you won’t always be right, but it will help to keep risk small. It may even take a few shots at getting back on board with the momentum in the direction of a strong trend, but that’s perfectly fine.

One additional strategy may be helpful for some of the more advanced readers. The fact is that we don’t have to pick to use only a limit or momentum entry. We can be prepared for both. You can use an OCO entry bracket with a limit order to buy below price at a level you feel is ideal, but if momentum takes off before that price, you can have some type of buy-stop order that will get you in for that scenario. When one of the orders is filled, the other is immediately canceled so you’re not accidentally entering double size.

I hope this has been helpful to some of you. No matter how you enter your positions, make sure risk management is your number one priority – especially during these more volatile times. For those that handle risk properly, the risk:reward during these times can be quite good.

Trade smart,


*No relevant positions.