10/27/2010

Three basic types of setups

There are only 3 basic types of setups. All traders trade a variation of these same setup.
1 Breakout
2 Pullback
3 Exhaustion
If you understand each of these kind of setup and the logic behind each of them , you will be able to design your own setups.
Start thinking in setup terms. Study setups of other traders. That will give you good idea. While there are many many trading blogs, you will find very few have very well defined setup. You will find many are just randomly spraying bullets hoping it will work.
Setup is a setof conditions a stock or a situation needs to fulfill to be considered for trade. Setups help you decrease cognitive load. If you have done good job of selecting and defining your setup, you would have answers to :
1 What kind of stock should I trade
2 When should I enter then
3 How much should I risk
4 When should I exit
You will have answers to all these questions before you enter a trade. Then the only thing you need to focus on is execution.
Setup should match your personality. Some people can trade breakouts, some can not. Some people have natural inclination towards trading pulbacks. Some like finding tops and bottoms, they trade exhaustion setups.
If you try and trade setup that does not match your personality it will not work It will lead to psychological stress.
Once you find a setup the next important step is to organize like crazy around that setup. All your scans, software, data sources, hardware, and processes should be optimized for trading that setup.
I trade primarily a breakout setup and everything is organised to trade those setups. For Top25 breakout I have a well documented method and supporting structure. So if I see a stock in scan I can instantly find out its float, its distance from six month high, number of 4% b/o in last few days, its earnings, sales, IBD rating, sector rank. Everything I need to make a decision is well organised. It takes me few seconds to find information I am looking for.
Similarly for Episodic Pivots setup I have everything well organised. One of the advantage I have is I get access to number of tools developed by members for free. For EP Skytrader developed a tool to rapidly find information and he gave me access to it.
For the sector breakout DC has developed the Bluefin which has simplified life. Earlier it used to take me half an hour to find stocks from leading sector now it takes few minutes.
There is a risk reward calculator which quickly allows me to find R/R. Same way the position sizing tool allows me to calculate how much to risk.
For every single method I trade I have a tool or a routine and I stick to it. What it does is it reduces cognitive load, it makes you confident, and you are in control of the situation.
Many traders are not well organised around their setup and spend lot of time on unwanted processes or change routine . That is not very helpful. Organize like crazy around your setup and you will find trading becomes easy.



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