Forex Trade Setups

Trade Setups -The Art of Waiting

If you study financial markets from a historical perspective, you’ll notice that history tends to repeat itself. There is a continuous cycle that begins with fear and ends with greed—a cycle that creates many opportunities for profitable trading. However, to capitalize on these opportunities, you need the right trade setups. A trade setup refers to a specific configuration that includes basic entry rules along with a few confirming conditions.

The Importance of Trade Setups

A trade setup aims to deliver positive average performance in a high percentage of trades. Once you have the right setup, it’s crucial to wait for the market to come to you—not the other way around. Remember, there is no risk when you are out of the market. Trade setups are important for several reasons:

1. Identify the exact levels to enter and exit the market, enabling you to time your trades perfectly and avoid premature entries.

2. Recognize the true trading range and accurately calculate the risk/reward ratio of each trade.

3. Set the appropriate pending orders for stop losses and take profits.

4. Trade with discipline by minimizing fear and greed, which helps optimize your long-term trading results.

General Examples of Trade Setups

Here are some popular trade setups:

• Breakout Setup

• Continuation Setup

• Price Reversal Setup

• Range-Boundary Setup

• Triangle Setup

Advantages of Using Trade Setups

Trade setups can help you automate your decision-making process and save valuable time. They allow you to:

• Be prepared to seize any trading opportunity

• Avoid costly mistakes

• Automate your trading process

• Save a significant amount of time

• Enter promising trades at early stages

• Reduce or even eliminate emotional influence

The Importance of Waiting Until the Market Comes to Your Setup

Once you have the right trade setups, it’s crucial to wait for the market to come to you—not the other way around. Modifying your setups to fit current market conditions is a critical mistake. Remember, there is no risk when you are out of the market. Professional traders wait for the market to move in their favor before deciding to trade.

As Martin Taylor once said:

“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 offer a full range of pending orders, which are ideal tools for executing your trade setups.

Pending Orders for Reversal Patterns

1. Buy Limit: You buy the market only if the ASK price reaches your predefined buy-limit level. This order is placed anticipating that the price, after falling to a certain point, will reverse upward.

2. Sell Limit: You sell the market only if the BID price reaches your predefined sell-limit level. This order is placed anticipating that the price, after rising to a certain point, will reverse downward.

Pending Orders for Continuation Patterns

3. Buy Stop: You buy the market when the future ASK price hits your predefined buy-stop level (which is above the current ask price). This order assumes the price will continue rising after reaching that level.

4. Sell Stop: You sell the market when the future BID price hits your predefined sell-stop level (which is below the current bid price). This order assumes the price will continue falling after reaching that level.

Trading Triangle Setup

Below is a strong triangle pattern on the EUR/USD chart, representing an ideal setup for high-leverage trades.

Image: EUR/USD (Monthly)

Observations:

• The price has touched the upper boundary 4 times and the lower boundary 4 times.

• Each time the price touched a boundary, the trend reversed, at least for several months.

• When the price breaks out of such a large triangle, a significant trend is expected to follow.

• Although the triangle officially ends at the end of 2021, these patterns often break a little earlier.

How to Trade this Triangle Setup

You will encounter this exact setup hundreds of times when trading global financial markets. There are two main ways to trade this triangle:

1. Trade the reversal each time the price touches the upper or lower boundary of the triangle.

2. Trade the breakout at the end of the triangle. Note that these triangles often produce false breakouts in one direction before eventually moving strongly in the opposite direction.

Riding the Trend Using MACD

In the example below, a strong and ongoing bullish trend is evident for USDCAD.

Image: USDCAD (H4)

We can observe a clear sequence of higher highs and higher lows, indicating a bullish trend. To find the ideal entry points for riding this trend, we use a simple trading setup based on the MACD (12,26,9) indicator. This indicator generates several potential entry signals.

Positional Trading

In the example below, we see a trading setup on the monthly chart for Bitcoin.

Chart: Bitcoin Monthly (MN) Setup

This setup is based on the monthly chart (MN), and consists of:

• 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 Support & Resistance (S&R) lines, the two Simple Moving Averages (SMAs), and especially the two triangles create key support and resistance price levels.

• By measuring the distance between each support and resistance level, we can calculate the trading range.

• Don’t expect exact market hits on these levels, although they may occur occasionally.

• Extra importance is given to where each calendar month closes in our analysis.

• The price typically retraces when it reaches any of these support or resistance levels.

• Each time the price crosses above or below these levels, a significant movement is expected.

■ Forex Trading Setups

Giorgos Protonotarios, Financial Analyst, for ForexAutomatic (2020)

(1) "Hedge Fund Market Wizards: How Winning Traders Win": Jack D. Schwager

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