The recent market volatility has allowed many traders to re-evaluate their risk parameters and trade entry processes in their trading plan. Should I adjust my default-two point risk on an ES futures contract? What about my targets or scaling out process? Should I reduce size? These are all good questions and one should consider these variables in a high volatility market arena.

An often-overlooked trading component is regarding the trade entry process. Many new traders follow a confirmation/pullback entry process. That is, they wait for a reversal in trend to be confirmed and then attempt to buy a pullback in price. This style can be very effective should one have the required patience and discipline.

There are challenges, benefits and risks with any entry strategy. The most conservative of strategies such as the confirmation/pullback method usually have an opportunity cost component to them. The inability to participate in price movement due to price not pulling back to meet your entry order is common with this strategy.

We have encountered many ‘V’ pivot price occurrences in these highly volatile markets. Many of these setups that do not pullback are formed at the eventual high or low price of the day. One can be right on market direction, price level, and yet still miss a major move. The markets can be cruel in this regard. As traders, we cannot control market dynamics but we can control execution and risk – two critical components to consistently successful trading. Responsively entering a position rather than confirmation has proven extremely beneficial and should be considered in your trading arsenal.

So why are so many traders non-responsive? One reason is simple: fear. Most traders were initially taught using typical candlestick charts. Green bars signifying strength and red showing a weakening and declining price. All the books we read told us to follow the trend, buy pullbacks, wait for confirmation and ‘never try to catch a falling knife’.

Simply put, many traders find it more comfortable to enter after a confirmation signal. Of course, defining ‘confirmation’ may be the first consideration. A responsive trader who enters at a key inflection or pivot point because price has reached that level is confirmation in their eyes. There is no need to wait for a traditionally defined confirmation because their confirmation parameters have already been met at the inflection point.

The most difficult thing to teach traders is to trade without fear. The human condition is designed to avoid perceptually dangerous situations. Fear is merely our human protective reaction to avoid danger. A responsive entry approach at times can be much more advantageous than confirmation trading and those results in itself can sometimes reduce the fear in using this approach. Being selectively responsive will help increase your success probability and profitability.

So how can we be more selective? I become a responsive trader when three conditions are met.

1. Indicator confluence to support the responsive entry.
2. Price is approaching a key pivot or reference area for the first time.
3. Evidence of divergence especially in the market internals.

It is common for prices to pivot, sometimes sharply, at the initial test of a key reference area. Perhaps a self-fulfilling prophecy, responsive traders will enter with the notion that others slightly late to the party will join as price confirms. Did you ever enter late on a confirming price bar only to have the trade pull back and hit your stop price? It’s happened to all traders. Most responsive traders become responsive after learning that confirmation candles can be comforting but costly.

In addition to being responsively selective initially at key price levels, once should also add an internal filter to help improve the risk and success potential of the trade. Two effective supporting filters I have in my plan are volume exhaustion and tick extremes.

High volume spikes are commonly used to show exhaustion of the current movement and potential reversal in price. Using a volume spike filter at key pivot areas is a solid premise to consider using a responsive entry strategy, particularly in a downward move. Using an extreme tick-reading filter is also a powerful tool in my responsive trading arsenal. Tick extremes can be effective, specifically when the extreme readings are not continuous. Price divergences are also effective but like any indicator, can stay divergent for long periods. Combining the use of exhaustion volume, tick extremes, and divergences at key reference areas is my confluence-filled recipe to play the responsive entry. Nothing ever works perfectly and solid exit strategies will protect you when it doesn’t.

Still have some fears about trying to catch the bounce? Try entering the world of responsive trading in simulation. Add a column in your trade journal to show the result if it met the above criteria and you had entered responsively. Another option is to take half of your intended position using a responsive entry and then add one confirmation style. As with any data-driven plan, let the results dictate your decision to modify your strategy. After entering a responsive trade and then start to see price action reverse in my favor, I know I’m in a favorable position. In fact, sometimes I’ll take a break on my soft-cushioned wicker chair in my office while giving my trade a chance to work. Ah…now that’s comfortable.

For more from Rick, visit Value Zone Trading to follow his blog.