Trade Setups -The Art of Waiting
If you investigate financial markets from a historical perspective, you realize that history tends to repeat itself. There is a never-ending circle that commences with fear and ends with greed. A circle that leaves a lot of room for profitable trading. However, in order to take advantage of these opportunities, you need to have the right setups. A trade setup refers to a specific configuration that includes some basic entry rules and a couple of confirming conditions.
The Importance of Trade Setups
A setup aims to deliver positive average performance in a high proportion of trades. Once you have the right trade setup, it is important that you wait until the market comes to you, not the other way around. Remember, there is no risk when someone is out of the market. Trade setups are particularly important for a number of reasons:
(1) Recognize the exact levels where you should enter and exit the market. Time perfectly your trades (avoiding early entries)
(2) Recognize the true trading range and calculate accurately the Risk/Reward of each trade
(3) Place the right pending orders for limit losses and take profits
(4) Trade with discipline, by eliminating fear and greed, and optimize your trading results in the long-run
General Examples of Trade Setups:
These are some popular trade setups:
- Breakout Setup
- Continuation setup
- Price Reversal setup
- Range-Boundary setup
- Triangle Setup
Advantages When Using Trade Setups
Trade setups can help you automate your decision-making process and save precious time.
- Be prepared to take advantage of any trade opportunity
- Avoid mistakes
- Automate your trading process
- Save a lot of time
- Enter promising trades at early-stages
- Reduce or even eliminate the emotional effect
The importance of waiting until the market comes to your setup
Once you have the right trade setups, it is important that you wait until the market comes to you, not the other way around. It is a critical mistake to modify your setups in order to meet the current market conditions. Remember, there is no risk when a trader is out of the market. Professional traders wait until the market moves favorably, and only then they decide to trade.
As Martin Taylor once said (1):
“If you don’ t understand why you are in a trade, you won’t understand when it is the right time to sell, which means you will only sell when the price action scares you. Most of the time when price action scares you, it is a buying opportunity, not a sell indicator.”
Pending Orders and Trade Setups
Modern trading platforms provide a full set of pending orders. These pending orders are the perfect tools for trading your setups.
PENDING ORDERS FOR REVERSAL PATTERNS
(i) Buy Limit: You buy the market only if the "ASK" price matches your pre-defined buy-limit value. This type of trading order is placed in anticipation that the price of a financial asset, having fallen to a certain level, will reverse.
(ii) Sell Limit: You sell the market only if the "BID" price matches your pre-defined sell-limit value. This type of trading order is placed in anticipation that the price of a financial asset, having increased to a certain level, will reverse.
PENDING ORDERS FOR CONTINUATION PATTERNS
(iii) Buy Stop: You buy the market provided the future "ASK" price is equal to your pre-defined buy-stop value (buy-stop value is above the current ask price). This type of trading order is placed in anticipation that the price of a financial asset, having reached a certain level, will keep on increasing.
(iv) Sell Stop: You sell the market provided the future "BID" price is equal to the pre-defined sell-stop value (sell-stop value is below the current bid price). This type of trading order is placed in anticipation that the price of a financial asset, having reached a certain level, will keep on falling.
Trading Triangle Setup
In the following, there is a very strong triangle on EURUSD. That is the perfect setup for high-leveraged trades.
Image: EURUSD (MN)
- The price has touched 4 times the upper boundary and 4 times the lower boundary
- All the times the price has touched a boundary, the trend reverses, at least for several months
- When the price breakouts such a huge triangle, an epic trend should be expected to emerge
- The triangle ends at the end of 2021, but usually, these triangles break a little bit earlier
How to Trade this Triangle Setup
You will find this exact setup hundreds of times when you trade the global financial markets. You can trade this triangle in two ways:
(i) Trading the reversal each time the price touches the upper or the lower boundary of the triangle
(ii) Trade the breakout at the end. Note that many times this type of triangles make a false price breakout in one direction and eventually move to the exact opposite direction for long
Riding the Trend Using MACD
In the below example, there is a strong ongoing bullish trend for USDCAD.
Image: USDCAD (H4)
We can recognize a very nice sequence of higher highs and higher lows. That means there is a bullish trend. In order to find the sweet spot for riding that trend, we use a simple trading setup based on MACD (12,26,9). The indicator produces several entry points.
In the following example, we can see a trading setup on the monthly chart for trading Bitcoin.
Chart: Bitcoin Monthly (MN) Setup
This setup is based on the very reliable monthly chart (MN), and consists:
- A Long-Term Symmetrical Triangle (1) which sets the long-term trading range
- A Short-Term (inside) Triangle (2)
- Three major historical Support & Resistance levels (3), (4), and (5)
- 21-month SMA (6)
- 50-month SMA (7)
Chart: Bitcoin Monthly (MN) Setup & Points of Reference
Explaining the Trading Setup
The three S&R lines, the two SMAs, and especially the two Triangles create key support and resistance price levels.
-By measuring the distance between each support and resistance price level we can calculate the trading range
-Don’t’ expect direct market hits, although they may happen
-We give extra weight on our analysis to where each calendar month closes
-The price should normally retrace when hitting any of the above support and resistance levels
-Each time the price crosses above or below any of the above support and resistance levels, we should expect a very movement
-You can use additionally the Fibonacci Retracement to spot the general retracement zones on this setup
■ Forex Trading Setups
Giorgos Protonotarios, Financial Analyst, for ForexAutomatic (2020)
(1) "Hedge Fund Market Wizards: How Winning Traders Win": Jack D. Schwager