Limit entries for reversion, market entries for momentum

[Fairman]

Limit entries for reversion, market entries for momentum

A common rule of thumb pairs order type with trade type. Reversion setups, where price is expected to return, suit limit orders placed at the extreme. Momentum setups, where the move is expected to continue, suit market or stop orders.

The reasoning is simple. In reversion, waiting for price to come to the level gives a better price and fits the thesis. In momentum, waiting for a pullback risks missing the move entirely.

Mixing them causes trouble. A limit entry on a momentum trade fills only when the trade is failing. A market entry on a reversion trade pays extra spread and often gets in too early.

The lines are not rigid. Some momentum traders use limits on shallow pullbacks, and some reversion traders use market orders at confirmed rejection. But the starting point is a good one.

A review of the trade log by order type and setup type can show whether the pairing matches reality, or whether some trades are using the wrong tool.

A simple audit is listing the last fifty trades with their setup type and order type, then calculating the average result for each combination. Mismatches show up quickly.

Do the order types in use match the logic of the setups?