Setups! Finding, Defining & Testing Them

[fxmarkets]

As for "a lot of variables", there are only a few, defining up, down, and sideways, as well as the trendline.

--Db

And the timeframe?

Relating that to the Bidu chart posted......... I see down/sideways but not up.... now given its timeframe of five minute intraday, is this a setup for an intra day day trade ? as i wouldn't put a position on at that stage to hold overnight I'd wait for the next session. Back to timeframe of setup? daytrading or longer.

 

[fxmarkets]

Yes but with that Bidu chart posting for the sake of objective learning for the many. Now ive stated I wouldn't trade it based on the time of day assumption its an intraday setup on a 5 minute chart, theres no reference of waveriding a big timescale ,daily,weekly,4 hourly etc. and theres lack of 1 minute or tic charts. so its totally subjective from the off because no timeframe has been stated (which any basic text book or study guide or teacher would probably state in order for the entire audience to have a basic objectivity) to aid the learning /discussion experience and gain knowledge.

But based on your what's worth it statement, relating this again to Bidu which is being fronted as the example to lead the discussion, what do we have from this market at that yellow oval zone. again based on the lack of objectivity, the movement, time of day we have the signal to close longs ie short (but not short to open) if we took the rise with volume earlier in the session. If we are trading it longertime frame or shorter timescale we need more information which is lacking?



so is it a pull back ,reversal or retracement or setup ? well yes its all of them depending on what timeframe you are trading to.

 

[barjon]

Any trader can make it as complicated as he wants. But the intent of this process is generally to force the chart into showing him what he wants to see rather than assessing what's in front of him.

As for "a lot of variables", there are only a few, defining up, down, and sideways, as well as the trendline.

--Db

Db

Agreed, but I was meaning varying methods between traders - not the individual trader making it complicated. For example, one may see a trend change on break of a trend line, another on swing high/low being taken out, another on s/r being taken out and so on.

Fxm

for my purposes it is a potential retracement which would first be be confirmed by the red swing low bar high being taken out (the red down bar leading into the yellow) and then by the 150 high going. Alternatively, if it went the other way and the low of that swing low bar goes I'd be seeing a potential reversal which would be confirmed by what happened on a subsequent correction.

good trading

jon

 

[charliechan]

If you do a search for threads with ‘Setup’ in the title, you’ll find only eight. One of these relates to hardware setups, another five discuss setups in general terms or focus on a particular well known one. The remaining two threads do explore how traders might go about finding, defining and testing prospective setups, but both threads are on a private members forum. It strikes me that it would be in the interests of the wider T2W community to have a thread which attempts to explore this vital topic in some depth.

Anyone who follows the posts of dbphoenix will know that this is a subject about which he has strong views. “Unless one has defined the setup, he cannot have tested the setup. If he has not tested the setup, he has no idea of the probability of its success. With no idea of the probability of success, any trades made off the undefined setup are essentially guesses”. A logical argument, forcefully made. But before you define a setup, you have to find a new one - or choose an existing one, which in itself isn’t always easy.

The purpose of this thread then is to focus on the process of finding, defining and testing a setup. How do you do this? Just as the thread ‘A Trading Plan - You MUST Have One!’ was started with the hope of creating a template; similarly, it is hoped that input from members on this thread may result in a step-by-step guide which any trader can follow to help them complete what is arguably the most complex part of any trading plan.

Tim.

the internet is littered with 'setups'

books too.

its all crap though unless you know how to manage the trade.

trade management is all crap though unless you know yourself.

personally i dont like this idea of 'setups' as you describe it in terms of being so explicit so it can be quantifiably defined, identified and tested is at all useful

trading is not a science. period. so why take this scientific approach?

you would be better off at identifying market conditions.

you would be better off studying how to manage yourself and then your trades

you would be better off studying how markets work, who operates in the markets, how they operate, when they are in the market.

then you will find the answers to your questions: the markets are not scientific. a scientific approach will get mediocre results at best, before that money is promptly taken away just as you were beginning to think this trading gig was sussed.

 

[timsk]

. . . But the intent of this process is generally to force the chart into showing him what he wants to see rather than assessing what's in front of him.
--Db

I hope this is meant to be sarcastic; if not, I've got the wrong end of the stick! 😱
I thought the whole point of a 'scientific approach' as charliechan puts it, is to minimise the risk of interpreting the chart falsely. Surely the key merit of this approach is to assess each chart in an even handed, consistent and unemotional way and, in so doing, allow the story contained therein to reveal itself in a way that either qualifies or disqualifies the chart as a setup for a potential trade?

On a separate note, reading through all the posts, it strikes me that there are few universally accepted definitions of everyday terms like 'retracement' and 'trend'. Within the context of the thread, can we agree upon a simple definition so that we can move on to the creative side of the process: finding setups? I accept fully that each trader must thoroughly define these terms within the context of their own trading plans to achieve maximum benefit (i.e. profits!) but, obviously, that's not possible to do in this thread. There must be a common denominator . . .

Tim.

 

[fxmarkets]

trading is not a science. period. so why take this scientific approach?

you would be better off at identifying market conditions.

you would be better off studying how to manage yourself and then your trades

you would be better off studying how markets work, who operates in the markets, how they operate, when they are in the market.

The observation, identification, description, experimental investigation, and theoretical explanation of phenomena.
Such activities restricted to a class of natural phenomena.
Such activities applied to an object of inquiry or study.
Methodological activity, discipline, or study: I've got packing a suitcase down to a science.
An activity that appears to require study and method: the science of purchasing.
Knowledge, especially that gained through experience.

This is why science is a very beneficial way to gaining insight into the trading arena. You personally just apply science without knowing it is science, which is perfectly o.k.

Like you say "better off studying how markets work" Science my friend, welcome aboard.
Like you say "better off studying how to manage yourself and then your trades" Sciennnnnce
Like you say "better off identifying market conditions" " " " " ditto .

Now charliechan, consider your ignorance in this matter over and dealt with, enlightenment is there for the taking.

Your very Welcome.

 

[charliechan]

The observation, identification, description, experimental investigation, and theoretical explanation of phenomena.
Such activities restricted to a class of natural phenomena.
Such activities applied to an object of inquiry or study.

Methodological activity, discipline, or study: I've got packing a suitcase down to a science.
An activity that appears to require study and method: the science of purchasing.
Knowledge, especially that gained through experience.

This is why science is a very beneficial way to gaining insight into the trading arena. You personally just apply science without knowing it is science, which is perfectly o.k.

Like you say "better off studying how markets work" Science my friend, welcome aboard.
Like you say "better off studying how to manage yourself and then your trades" Sciennnnnce
Like you say "better off identifying market conditions" " " " " ditto .

Now charliechan, consider your ignorance in this matter over and dealt with, enlightenment is there for the taking.

Your very Welcome.

LOL -

just because we watch and study does not make us scientists.

all the great artists studied and observed their subjects, but that does not make them scientists does it.

i believe you need to pick up a dictionary before trying to get cute with me kiddo.

btw - if you think self management is a science then you have a long way to go yet.

all the best.

 

[blackcab]

"Science" as popularly understood = numbers, maths, bunsen burners, computers, spectacles, and generally being Mr. La Di Da Logic.

"Science" as scientists understand = "the scientific method" = observe > hypothesise > devise experiment > test > interpret > accept the hypothesis stands, revise it, or throw it away, all in an unemotional, disinterested way.

The first definition is rubbish but unfortunately widespread; the second definition is a rock solid foundation for anyone making a serious attempt at solving a problem, including many that may intuitively seem "not scientific".

 

[charliechan]

a scientific approach to trading may be fine for a raw beginner - maybe even advisable while the ropes are learnt. after that we must develop market feel and intuition (different from instinct)

if making money in the markets was as easy as a scientific theory, we'd all be zillionaires now.

 

[fxmarkets]

LOL -

just because we watch and study does not make us scientists.

all the great artists studied and observed their subjects, but that does not make them scientists does it.

i believe you need to pick up a dictionary before trying to get cute with me kiddo.

btw - if you think self management is a science then you have a long way to go yet.

all the best.

Hello charlie

your first point . It doesn't ? why not?
second they wern't ?
third I did.
fourth well based on what science is, an aspect of self management is science.

Now words mean nothing its just the association we attach to them, why do you appear to have a hang up with associating yourself engaging in science of the markets..?

Please im your humble student and you master . I'm open to learn.
But dont feel threatened with what I type charlie they are just words to stimulate potential opportunities for learning.
And science is very applicable to trading and indeed setups .
To quote forexhusky... "Lets Talk"

Best wishes .
And charlie we can all walk into a room and say how rubbish an idea may appear to us and turn and simply walk out, feeling all mighty and that told them lot mentality. but really it says nothing about what is being discussed, it is has no validity, you are simply defining yourself.
come in sit down and participate we all may learn something new.

 

[dbphoenix]

I hope this is meant to be sarcastic; if not, I've got the wrong end of the stick! 😱

It refers to the approach advocated by chan.


--Db

 

[blackcab]

Well, if solving any of the 'hard' science problems was "as easy as a scientific theory", we'd also all be zillionaires by now, as well as multi-Nobel prize winners, but that doesn't mean that understanding consciousness, curing cancer or ironing out quantum gravity are going to be solved by feel and intuition in place of the scientific method. Bit of both, certainly, but no-one with a clue would say that science excludes feel or intuition, the two are not mutually exclusive. The popular definition of science as seen on these boards does exclude feel and intuition, however, that was the point I was trying to make.

 

[charliechan]

Hello charlie

your first point . It doesn't ? why not?
second they wern't ?
third I did.
fourth well based on what science is, an aspect of self management is science.

Now words mean nothing its just the association we attach to them, why do you appear to have a hang up with associating yourself engaging in science of the markets..?

Please im your humble student and you master . I'm open to learn.
But dont feel threatened with what I type charlie they are just words to stimulate potential opportunities for learning.
And science is very applicable to trading and indeed setups .
To quote forexhusky... "Lets Talk"

Best wishes .
And charlie we can all walk into a room and say how rubbish an idea may appear to us and turn and simply walk out, feeling all mighty and that told them lot mentality. but really it says nothing about what is being discussed, it is has no validity, you are simply defining yourself.
come in sit down and participate we all may learn something new.

sorry - i really dont think i have anything else to add that i havent already stated.

i can only see this going in the direction of arguing over semantics - something i have little time for - especially on fomc day

whats the point in defining what a science is and whether the likes of picaso, et al were scientists or not. i dont think it will help my trading or yours.

 

[SOCRATES]

And aso simple in the end analysis, but it is made so complicated.

One can only look upon these commentaries in wonderment.
ll of it is

 

[timsk]

Oh Soc', - what joy it must bring to observe in wonderment the ability of others to make the simple complicated! The purpose of this thread is to try, via mutual help and support, to raise the general level of awareness towards the lofty heights that you enjoy. Any contribution to this effort will, I'm sure, be appreciated greatly!
😉

The debate between science and mastery of self is an interesting one, but it's way beyond the scope of this thread. For the sake of clarity, allow me to restate and, to some extent, expand on what I hope can be achieved.

1. It's aimed primarily at novice to intermediate traders.
2. Inherent in the thread is the idea that finding, defining and testing setups is worthwhile.
3. It's only part of an overall trading plan; other sections of which would definitely include self knowledge, market conditions and psychology etc.
4. There is no intent whatsoever to preach one approach in favour of another or to suggest one way is right and another is wrong. Each to their own; live and let live.
5. There is every intent to try to produce a simple step-by-step guide which may help a struggling novice to intermediate trader make some progress in arriving at a tradeable setup - assuming that's what they want.
6. It is not an attempt to arrive at a simple fix it 'holy grail' solution to developing and trading a setup which makes consistent profits. It ain't gonna happen and, as stated in No 3., this process isn't enough on its own - it's just one piece of the jigsaw.

I hope everyone is clear on what is trying to be achieved here - feel free to PM me if further clarification is required.

Tim.

 

[SOCRATES]

I agree you have to start using a point of reference, or start point.

Your idea of using setups is a good one.

The thing is that there are many setups and families of setups and relatives of families of setups.

Each of these is extant with a kaliedoscope of varying market conditions.

The difficulty might be being able to illustrate all of these sequentially.

It would be ideal if market conditions remained sufficiently stable for indefinite periods of time in order to catalogue and illustrate each setup, setup family, and setup relative in an ordered and sequential fashion.

As this is not the case, I would recommend to you that you number them so that they can be identified in their proper order of magnitude, propensity and structure.

The best that can be done is to capture them as they appear and then perhaps rearrange them to read in context, otherwise you will not end up writing a thread, but an extended encyclopedia instead.

Alternatively, you could divide them into categories :~

Bear setups.
Bull setups.
Racking setups.
Bottom setups.
Top setups.
Sideways setups.
Indeterminate setups.
Repeated setups.
Contraries.
and so on.

Kind Regards,

 

[timsk]

So, where are we at in this process of trying to find, define and test setups. Here's my assessment. . .
1. Most setups fall under one of three trade types: breakouts, reversals and retracements.
2. As far as is reasonably possible, it's helpful to define ones terms so that one has a clear understanding of what one is trying to look for.
3. The above poses a particular problem in the context of a thread such as this because, as has been demonstrated, these terms mean different things to different people depending upon markets traded, style of trading and time frames etc. etc.

That said, here are some generic definitions which each trader can define and re-define to their hearts content.
Setup
A setup is a specific set of market characteristics that are well defined, tested and easy to spot in real time in order that a trader can identify a prospective high probability trade prior to his/her entry trigger.
Retracement
A retracement is a "pullback" or correction within an ongoing trend.
Reversal
A reversal is a reversal of that trend. This, of course, requires definition and understanding of "trend".

So far, there haven't been any suggestions for 'breakout' and 'trend'. Here are some possibles:
Trend
An uptrend is characterised by a series of higher lows and a downtrend is characterised by a series of lower highs
Breakout
A breakout is characterised by price moving beyond an identifiable range or zone which had previously contained or restricted its movement.

Okay folks, the sooner we can wrap this up - the better. We're already on P5 of this thread and we haven't even started to discuss how we go about finding our setups. The good news is . . . that's the fun bit and it comes next!
Tim.

 

[frugi]

Soc would you mind expanding a little on the "Racking" and "Repeated" setups as they are terms I'm unfamilar with? Thanks.

 

[SOCRATES]

Racking :~ When the intent of ultimate direction is not clear and there is very marked volatility, but this volatilty is regular, that is, it is clearly bounded by support and resistance. Then this in its own right is a tradeable condition, by buying on bottoms and selling on tops, but it must be done with split second timing for it to be effective. It is most effectively done by using limits instead of market orders.

Repeated:~ When price action is clearly repeated sequentially. As for example in double tops and double bottoms, triple tops and triple bottoms, then when absolute familiarity is gained with the instrument, the correct point of entry announces itself because the price action ceases to do what it was doing previously.
This is a cue to open a position without hesitation, fast, and with stops to protect in all cases.

The key to these both examples is fast execution and super fast exit.

 

[frugi]

Thank you Soc. One more if I may - how would Racking differ from Sideways? Presumably similar but with much less volatility and therefore decreased reward:risk?