Price action in markets repeats itself; history proves this. By studying charts and price action, a trader can seek out correlations that suggest where prices may be headed in the near term.

- Jim Wyckoff

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Enter? Exit? Or just WAIT? The Futures Trading Road Sign Guide, a group of articles compiled by Jim Wyckoff and offered through RJO Futures, is the perfect "road-side" guide for your futures trading travels to more successful trading. Including information about Wyckoff's favorite setup for better entering and exiting of trades, you won't want to hit the trading highway without this educational tool.

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Hello traders from around the world. I very much enjoy providing you with some fresh and unique market and educational perspective that will hopefully help you become a more successful trader. In this issue, I'll touch upon market entry and exit strategies and upon the all-important price trend of a market.

I receive many email messages from readers all over the world asking about how to best determine entry and exit strategies when trading markets. Here are just a few of their quotes:

• "Though my success rate has been high, I am only breaking even financially -- due to getting out too early in profit and letting my losses run too far."
  
  
• "Many articles are written showing when and where to enter trades -- but how many articles are written about 'running' positions? Where to exit surely has to be the biggest key to trading success!"
  
  
• "I would appreciate some advice or tips on how to and when to enter a market and when to exit."

If you are in a trade, you should already have a general plan of action in place (including potential entry and exit points). Certainly, you can alter your plan of action in the heat of battle, but you should not enter any trade without having a well-thought-out trading plan. Also in your trading plan, you can keep in mind a few scenarios that could occur and what you would do if they did occur.

Entry and exit points in trades mostly should be based on some type of support or resistance levels in a market. For example, in the gold market at present, some traders think prices are close to a bottom. But I won't go long a market just because I think it's close to a bottom. I need to first see some technical strength in the market. I will wait for the market to push up through a chart resistance level and begin a fledgling uptrend.

Then if I do go long, I'll set my protective sell stop just below a support level that's not too far below the market. And if the trend does not develop and the market turns back south, I'm stopped out for a loss that's not too painful.

Another way to enter a market that is trending (preferably just beginning to trend) is to wait for a minor pullback in an uptrend or an upside correction in a downtrend. Markets don't go straight up or straight down, and there are minor corrections within a trend that offer good entry points. The key is to try to determine if it is indeed just a correction and not the end of the trend.

On when to get out of a market when you're losing money, I have a simple but very effective answer: Upon entering the trade, if you place a sell stop below the market if you're long (buy stop if you're short), you know right away approximately how much money you will lose in any given trade.

One should never trade without employing protective stops. Thus one should never be in a trade and have a losing position, and not know where one's exit point is going to be. I prefer setting tighter stops, because I'm a conservative trader and want to survive financially to trade another day. Yes, I'll get stopped out sometimes and then right away the market will turn in the direction I had planned. But by setting tighter stops, I will not be in a position where I lose substantial money because I'm fighting the market, "hoping" it will soon turn in my favor.

What about when you've got a winner going and good profits already in place? This is the time to employ "trailing stops." For example, if you're long a market and it reaches your initial upside objective, but now you really think there may be more upside and you don't want to exit your trade. You then put in a sell stop at a certain level below the market, which allows you to stay in the winning trade. But if the market turns south, you are stopped out and still have a decent profit.

I can't tell traders exactly at what percentage below the market (above the market if they are short) they should set stops or trailing stops, because all markets are different at different times, and traders have different views on how much money they can stand to lose. However, a general rule of thumb is to place stops and trailing stops just below a support level that's not too far below the market. (If you're short, place the buy stops not too far above the market.)

Protective stops are not a perfect money-management tool, but they are very effective in helping to solve one of the most important elements of futures trading: When to exit a position.

The Venerable Trend Line
In some of the educational stories I have written, I discussed my "primary" trading tools and my "secondary" trading tools. I also mentioned that the more tools one has in his or her "trading toolbox," the better the odds for trading success. Here I will focus on one of the most basic -- yet most powerful -- trading tools: the trend line.

As a refresher, I'll reiterate that my "primary" trading tools are basic chart patterns, such as triangles, double-tops and bottoms, head-and-shoulders formations, flags, pennants, etc. -- and of course, trend lines. I also consider fundamental and intermarket analysis as primary trading tools.

My "secondary" trading tools are the computer-generated technical indicators, such as moving averages, Slow Stochastics, MACD, RSI, DMI, etc. Volume and open interest are also categorized as my secondary indicators.

John J. Murphy says in his excellent book, Technical Analysis of the Futures Markets (Prentice Hall, 1986): "The importance of trading in the direction of the major trend cannot be overstated. The danger in placing too much importance on oscillators, by themselves, is the temptation to use divergence as an excuse to initiate trades contrary to the general trend. This action generally proves a costly and painful exercise. The oscillator, as useful as it is, is just one tool among many others and must always be used as an aid, not a substitute, for basic trend analysis."

On drawing trend lines on the charts, the methodologies vary -- and there are really no hard and fast rules. Like much of technical analysis, drawing trend lines is more art than science. When drawing an uptrend line, you draw a straight line up to the right along successive "reaction" lows. A downtrend line is drawn to the right along successive rally peaks.

It's important to note that the more times the rally peaks or reaction lows touch the trend line, the more powerful the trend line becomes.

The rule I use for the negating of trend lines is that prices must penetrate the trend line resistance or support level -- and then see follow-through strength or weakness the next trading session. However, if prices make a big push above or below the trend line, then that trend line is negated without needing follow-through confirmation.

Regarding market price trends, in general, a price uptrend is defined by a series of higher highs and higher lows on a bar chart. A downtrend is defined by a series of lower lows and lower highs. "Reaction highs" in a downtrend are simply an upside price correction in a downtrend, with the downtrend then resuming after the reaction high. "Reaction lows" are defined as a downside price correction in an up-trending market, before the uptrend then resumes. Importantly, an uptrend will remain in place until the last reaction low is penetrated on the downside. A price downtrend will remain in place until the last reaction high is penetrated on the upside. In fact, many veteran traders only consider this definition of price trend as valid.

John Murphy's book, which I mentioned above, has much more detail on trend line analysis, as well as other basic chart patterns.

The risk of loss in trading commodity futures and options can be substantial. Before trading, you should carefully consider your financial position to determine if futures trading is appropriate. When trading futures and/or options, it is possible to lose more than the full value of your account. All funds committed should be risk capital. Past performance is not necessarily indicative of future results.

Jim Wyckoff is a contributing analyst for RJO Futures . He has spent nearly 25 years involved with the stock, financial and commodity markets. He was a financial journalist with what is now the Dow Jones Newswires service for many years, including stints as a reporter on the rough-and-tumble commodity futures trading floors in Chicago and New York. As a journalist, he has covered every futures market traded in the U.S., at one time or another. Not long after he began his career in financial/commodity market journalism, Jim began studying technical analysis. By studying chart patterns and other technical indicators, Jim realized the playing field could be leveled between the "professional insiders" in the markets and traders/analysts like him.

Get Your Futures Trading Road Sign Guide.

Enter? Exit? Or just WAIT? The Futures Trading Road Sign Guide, a group of articles compiled by Jim Wyckoff and offered through RJO Futures, is the perfect "road-side" guide for your futures trading travels to more successful trading. Including information about Wyckoff's favorite setup for better entering and exiting of trades, you won't want to hit the trading highway without this educational tool.

Get Your Copy.