*Originally published in French on abcbourse.com, June 13, 2014. The French original is still online at abcbourse.com. Read it there if you want to check this translation against it. Translated, not rewritten: what follows is the original argument as it was made, including what time has since proven wrong. Where that happens, you'll find a note from the desk, dated 2026.*
When you start out trading, one of the first things you try to do is build some reasoning around your buy price.
Answer the question: when should I buy, and at what price?
The logic seems airtight: if you're going to buy something, that decision had better be weighed, reasoned, calculated.
To do that, you lean on what you read, on what you've been taught, and on the experience you build for yourself, face to face with the market.
There are the technical analysis crowd. That fashion feels a little less strong now than when I started out (1995).
There are those who call on "forces" supposedly steering the markets: Elliott waves, Fibonacci, Gann, cycles, Harmonics, Ichimoku, and the rest.
There are the fundamentalists (I jest). Who pore over balance sheets to work out what a stock ought to be worth, or how far the price has drifted from its theoretical value. The list goes on, and on...
Most of the time, reading between the lines, the reasoning also bakes in a price target. Stock X will run up to there, index Y will climb like this, then like that.
Once again, on paper, the reasoning is watertight.
The trouble is that, without realising it, the apprentice trader has just dug his own grave, or to be precise, his trading account's.
In everyday life, we buy things constantly.
And we've built up several habits for making those buying decisions: considered, comparative, driven by passion, impulsive...
And those are exactly the habits we'll later carry over into our trading decisions. Only snag: trading isn't buying to consume. It has NOTHING TO DO with that.
We should probably ban the word "buy" from the trading vocabulary altogether, just to stop ourselves sliding into that reasoning.
If you're not buying when you open a trading position, then what exactly are you doing?
Well, you're doing nothing more, and nothing less, than an accounting operation.
I'm taking a position on a financial asset because I'm looking to realise a short-term profit. Reasoning that should come hand in hand with managing your risk, like any financial operation.
Intellectually, it's entirely logical to see a market trade as a purchase. It's an asset, it has a price. Your brain slips straight into shopping mode.
And in shopping mode, you focus on the buy price, because you're going to consume the product. So you have to rationalise the process, at least a little.
It's fairly rare to buy a pair of shoes with the intention of reselling them later.
In reality, your buy price is probably the least important element in trading.
It should be obvious that what matters is what you stand to gain, or what you stand to lose.
Most people find it very hard to detach those ideas from the purchase, or from the buy price.
You're going to tell me: but if I want to make money buying this or that, surely I need to buy it at a good price?
And there you go again, off shopping.
The buy price only matters through the potential of the trade. Not on its own.
Let's take an example.
Say you want to buy a house. You'll pick a house you like, but you know it's inevitably an investment too. The sums involved are such that you can't afford to ignore that side of it.
When you buy your property, you're inevitably going to try to bet on how its value will develop.
In plenty of cases, people simply hope that the property market, which only ever goes up in the long run, as everyone knows (joke), will keep on rising.
But you know perfectly well it's possible to make a choice more likely to pay off than another: buying in a sought-after area, buying larger floor space, buying a rare type of property, and so on.
In those cases, people are often quite willing to pay more for a property because it has POTENTIAL. So they'll pay above the market price, betting that potential will earn them more than a "normal" property would.
What's obvious for a property purchase holds just as true for a long-term stock market investment.
For instance: say I think oil is going to become scarcer, so I buy some, because its price is going to rise.
You're going to tell me: surely I still have to decide what price to buy it at?
Which matters more: the buy price, or being right in your investment reasoning?
I've seen plenty of investors have a brilliant idea and never act on it, because they haggled over a price for the sake of a few cents.
The shorter your investment horizon gets, the harder, you'll agree, it becomes to have any certainty about where the price is heading.
You can say oil will climb over a ten-year horizon without being too wrong. Good luck saying what it'll do in the next ten minutes.
That's exactly why, consciously or not, a short-term trader pours so much attention into picking his buy price.
That's an ENORMOUS mistake.
The price doesn't matter at all. What the trader needs is market conditions that give his trade a chance of succeeding. He acts because the context favours this or that kind of trading. The buy price will hardly matter. If he's filtered and pinned down those conditions well enough, his trade will have a far higher probability of succeeding, whatever price he bought at.
It isn't the buying that makes your gain. It's what happens afterwards.
It isn't one single trade that makes your trading result. It's the sum of every trade you take.
Here are two facts I hope will finally convince you.
A good number of the trading strategies I've used for the past ten years have near-random entry signals. I could almost flip a coin to decide whether to open a position.
If, when I win, I take 2 euros, and when I lose, I cap it at 1 euro, you'll understand that with a 50% win rate, I'm going to make money.
What matters is what I win or what I lose, not at all the PRICE I buy at. What does matter, for that win rate to hold, is that I act at a MOMENT that gives me that 50% probability of success. The trader should focus on finding that moment his strategy needs to succeed, far more than on the price.
More proof: my strategies are coded in mathematical language, so it's very easy for me to vary certain conditions and see what effect that has on the trading.
Whenever I build a new strategy, I always run one simple test: I add or subtract a few ticks to my buy price, to see the impact on my overall result.
Take an example: a strategy that buys every time the price drops 5 points below the previous close.
Well, I'll test what happens with 4 points, or with 6, instead of 5.
Obviously, if I set it to 6, I'll get fewer trades over a long stretch (there are fewer days when the market drops 6 points below the previous close than 5). So fewer trades. How much do those missing trades affect my result over a long run?
And I run the same test with 4 points. There I'll get more trades. Again, what does that do to my result?
The entry price is nothing more than a variable that determines how many positions I'll be able to take in any given context.
It should be obvious that your trading result depends on what you do with those positions far more than on the price at which you got in.
Trading is a very demanding discipline.
And if, on top of that, you start out with the wrong foundations, the poor result is written in advance.
I hope you'll end up focusing a little less on the buy price, and a little more on the reasons why you're putting on your trades in the first place.
Related. Who's Capable of Holding a Position Like That? and Knowing How to Get Out of the Market. Background: limit order in the Ouinex glossary.
About the author. Samuel Rondot has traded financial markets since 1995 and is self-taught. He wrote a book on technical analysis, published a long run of trading columns between 2009 and 2016, and now runs the algorithmic trading desk at Ouinex.
Trading leveraged products carries a high risk of loss.
