Re-entry trading is a high-probability trading concept in my trading course. It is a simple but powerful concept that works in all markets. In this article, you will learn how to use it to improve the odds of your price pattern setups.
Specifically, we will focus on examples from the currency (forex) futures markets. Currency futures markets mirror the price action in spot forex but are centrally-cleared and much more regulated.
Now, what exactly is the re-entry strategy?
The Concept – What is Re-entry?
Look at the figure below. Does the following experience feel familiar?
- After carefully studying the market bias, you took a long Pin Bar trade in the EUR/USD forex market.
- Accordingly, you placed a pattern stop just below the Pin Bar. (the lower dotted horizontal line)
- The market punched to a new high. But shortly after, the market fell and hit your stop-loss order.
- Almost immediately after you got stopped out, the market leaped up again.
If you were agile and alert, you might have re-entered the position.
If not, you might have been left standing in the dust while the market blazed ahead without you.
In any case, you would be frustrated and have suffered a loss despite getting the market direction correct.
Now, this is where a re-entry strategy comes in. Using a re-entry trading approach, we aim to:
- Skip the first entry; and
- Enter the market only upon the re-entry opportunity.
A re-entry opportunity often offers a higher probability of success.
Essentially, we maintain our trading premise but delay our trade entry.
Formulating a Re-entry Approach
A re-entry trading strategy takes the following form:
- Find a trading setup with any price pattern. Let’s call this the original setup.
- Do not take the original setup.
- Wait for the traders of the original setup to be stopped out.
- Enter as the market reverses and resumes in the direction of the original setup.
As the traders of the original setup were stopped out, they would need to seek a re-entry.
In other words, they were trapped out of their positions and had to re-enter. Ideally, their re-entries would help to push the market in our favor.
Trading Guidelines – Forex Price Action Re-Entry
For simplicity, we will focus on a single price pattern, the Pin Bar, as our basis for re-entries for ease of discussion.
While the Pin Bar is a popular price action pattern among forex traders, feel free to replace it with any other price action pattern.
Long Re-Entry Trading Setup
Follow these steps:
- Look for a bullish Pin Bar.
- The next bar must trade above the high of the Pin Bar.
- The market must then fall below the low of the Pin Bar (but not too far below).
- Look to buy when the price breaks above any bullish bar.
Short Re-Entry Trading Setup
Follow these steps:
- Look for a bearish Pin Bar.
- The next bar must trade below the low of the Pin Bar.
- The market must then rise above the high of the Pin Bar (but not too far above).
- Look to buy when the price breaks below any bearish bar.
Explanation of Trading Guidelines
- This is the original setup that we do not take.
- This step observes that the original setup is triggered.
- Here, the original setup fails, and its traders get stopped out. However, the price action surrounding that failure must not impact our trading premise or assessed market bias.
- This final rule offers confirmation that the stop-out was a false alarm, leading us to re-entry.
Trading Examples – Price Action Re-Entry
The re-entry method is a trading approach and not a mechanical strategy. Hence, it’s best to appreciate how it works through examples.
In the examples that follow, the blue line is a 20-period exponential moving average (EMA).
The Pin Bars shown are marked out with our Price Action Pattern Indicator.
Example #1: Bullish Re-Entry
This is a 30-minute chart of the 6E forex futures, which corresponds to the EUR/USD forex pair.
- A bullish Pin Bar was bouncing off the EMA. It was a decent setup, but in our re-entry trading strategy, we would skip it.
- As the market rose above the Pin Bar, the traders who initiated their long positions got a nasty shock.
- Two bars later, the market fell and hit the stop-loss orders placed around the Pin Bar’s low (a typical pattern stop level).
- The market recovered quickly and offered a re-entry chance with a second bullish Pin Bar. As re-entry traders, we entered a long position as the market broke above the Pin Bar’s high.
After our entry, the market rose with a firm thrust.
Example #2: Losing Trade
To dive deeper into the traits that make the re-entry method works, let’s examine a losing trade.
This is an hourly chart of the 6J forex futures, which corresponds to the JPY/USD forex pair.
- A bullish Pin Bar was bouncing off the EMA after finding clear support around it.
- The Pin Bar was triggered, and some traders went long. (not us)
- After rising above the last trend high, the market fell and hit stop-loss orders placed at the Pin Bar’s low.
- As buying pressure emerged (lower shadows), we bought as the market rose above a bullish Marubozu.
- However, the market meandered for a few hours before continuing its downward trajectory, resulting in a loss for the re-entry.
This losing trade (6J) has several stark differences from the winning instance (6E).
First, the losing instance’s re-entry occurred below the moving average. It was a hint that the market bias has changed and was no longer bullish. On the other hand, the winning example’s re-entry setup bar had the moving average’s support.
Second, in the 6J example, the original entry and the re-entry formed much further apart compared to the 6E example. This lack of proximity was a sign that our original trading premise (Pin Bar with support) was no longer valid.
Third, the market hit a target projected from a triangle chart pattern (orange lines). Since the original setup coincided with the break-out of the triangle pattern, the projected target held sway.
After the market hit the projected target, it’s conceivable that some traders took their profits and closed their long positions. It follows that when the market fell, fewer traders were stopped out and trapped out. Hence, the re-entry approach was not ideal in this case.
Example #3: Delaying Entry To Improve Certainty
The re-entry approach is especially handy when you have a trading idea that requires further confirmation. Let’s take a look at such an example.
This is a 4-hourly chart of the 6A currency futures, which corresponds to the AUD/USD forex pair.
- The market was in a bull trend. However, the whipsaw with expanded bar range created an erratic market.
- Hence, at this point, when a bullish Pin Bar formed, we were unsure if we should trade it. In this case, a re-entry approach proved helpful.
- Instead of entering with the Pin Bar, we waited and observed that the market hit the standard pattern stop of the Pin Bar. However, the market did not continue falling.
- Recognizing the false alarm, we entered into a long position with this re-entry setup bar, with greater confidence than before.
Re-entry setups tend to work well when the original setup was barely stopped out, like in this example.
When a trade fails (gets stopped out), there are two possibilities:
- We got the market bias wrong; or
- We got the market bias right, but the timing was wrong.
The re-entry approach works best when we encounter the second scenario.
Hence, when you use the re-entry method, it’s critical to ensure that your trading premise is intact upon re-entry. If the market has changed so much that your original premise is no longer intact, avoid the re-entry.
Most importantly, understand that the re-entry approach does not remove the need for sound market analysis in the first place. It merely helps with finding a more reliable entry timing.
Conclusion – Forex Price Action Re-Entry Strategy
Overall, the re-entry trading method presents a simple way to enhance the probability of any price action pattern. Generally, good re-entries occur soon after the original setup.
The re-entry trading strategy is also versatile as you can use any price pattern as its basis.
For instance, in my trading course, I discussed the concept of re-entries with the patterns taught in the course, including the Trend Bar Failure and the Anti-Climax pattern. However, you can certainly apply the same idea using the price patterns you are already familiar with.
Furthermore, you can take this concept to markets beyond forex.
All it takes is patience. Skip the original entry and wait for the re-entry.
Like many other trading methods, it is not mechanical. It is a discretionary approach to trading that encourages prudence and patience. Always consider the market bias before using the re-entry trading strategy. Do not apply it in isolation.
Nonetheless, using a re-entry trading strategy in forex trading has its trade-offs.
The main drawback is fewer trading opportunities. At times, the market takes off spectacularly without offering a re-entry opportunity.
In such cases, we miss out on the profits. But this is the cost we pay for a better timing device.
If you tend to overtrade, I strongly recommend that you try out this re-entry trading method. It offers a trading technique that lowers trade frequency with a potential higher probability of success.
For more specific tips on finding the best re-entries, check out Day Trading with Price Action.
The article was first published on 13 July 2014 and updated on 21 January 2021.