Setup is a specific pattern or set of conditions a stock must fulfill to be considered for entry or exit.
There are few basic setups like breakout, pullback,events, exhaustion, or price pivots. Everyone trades a variation of them. Each one gives it his own name.
Some setups like buying breakout are reactive setup while buying pullback are anticipatory setup.
If I have to give one advice to a new trader, it would be to hunt for a setup. All successful traders trade a setup or a bunch of setups. They have skill specific to their setup. Successful traders have vast expertise on trading a very niche setup. That setup works for them or they have worked to make that setup work for them.
The problem for beginner trader is that as a beginner you will not understand the importance of a setup. Because there is no manual or book which tells you that the key to trading is to find setup.
Psychologist who have studied expertise know that any expertise is task specific. So defining a specific task to become an expert at is very critical.
The first step in becoming a good trader is to arrive at a tradable setup. And then become an expert in trading that particular setup. It is a very microscopic skill.
What is involved in developing a setup is you start with broad concept or start with setup that has worked for someone else and then make it work for you. For that you have to go through a versioning process. You refine and refine a setup till it works. This is a iterative process.
For example I trade a very simple breakout setups. Those setup have evolved over a period of years. Starting with a setup idea I picked up in The Hedge Fund Edge by Mark Boucher, I refined and refined the idea till it evolved in to current setups.
Currently I am working on a anticipatory setup where I am trying to guess a b/o point and enter before a b/o.
Once you select a setup build expertise in it by studying historical examples of it.Think about it a lot. Try and articulate why it works. What is the market structure that supports that setup idea.
The task for novice trader is to go from their current stage to a level where they have a setup which works for them and suits them perfectly. You will have immense confidence once you reach that destination. Once you can make a setup work, then it is easier to make other setups work or develop other setups.
I constantly look for setups and study other peoples setups. You will see most successful traders do the same.
Whenever I visit a blog or people send me request for linking I always look at what is this persons setup. If I find a good setup I study it. I may not use it, but it gives you ideas. So if you are a trader looking to progress your trading further think setup.
Once you have a setup your problem of cognitive load will decrease because you will be doing a very narrowly focused task. Once you find your own setup you will be able to shut out environmental noise.