Of all the facets of trading, the first that a new trader must learn before he can engage the markets with any degree of confidence is the identification of low risk entries on a price chart.  Notice that not just any entry will do, it must be those entries offering the biggest reward for the least amount of loss potential.

What defines a low risk entry?  I define it as the following – the price level where a trader can expose the least amount of capital to prove whether his edge will work.  I tell students to look for these areas by identifying “the line in the sand” or “drop-dead level” where price has to hold.  Generally, these are found at prior inflection points on the chart.

Specifically, inflection points can be spotted by looking for price levels on the chart where there was a clear change of direction.  In other words, where was the dominance of either the buyers or sellers relinquished?  Moreover, the more powerful the reversal, the more important that point becomes on the retest.  The chart in Figure 1 shows some of these turning points in TF (Russell 2000 E-mini).

This is an excerpt from May 2009 issue of Trader's Journal.