Trade Setups: Why it pays to wait for the highest quality Trade Setups

Regardless of the market you’re trading in, it’s vital that you only take the highest quality trade setups that you’re presented with. Not only does this mean that these setups are more likely to play out, positively impacting your P&L, but it also means that your strike rate increases (along with your psychology and belief in your trading system). 

In this post, we’re going to take you through the 5 main steps each Trader should have in their Plan to ensure their setups are as probable and profitable as possible. Now, it would be impossible to name each ‘High Probability’ setup for any given Strategy or Plan, as there are infinite ways to attack and trade the markets. Instead – what this post will detail is areas which are universal of any trade setup, such as Stop Loss, Entry Triggers, Risk to Reward and Targets. It will soon become clear why it does indeed pay to wait for the highest quality trade setups. 

The Setup: 

In order to be able to even consider taking a position, the initial Setup conditions need to be met in accordance with your plan. As with the rest of this post, all of this comes with the supposition that you’ve got a Trading Plan which defines what your Trading Conditions are.

For example, let’s say you’re a Trend Trader. You will need to identify a market which is trending. This is fairly easy to see, but can become more complex when identifying entry points on the Lower Timeframes. 

This image shows a Bullish Trending Market. As I’m sure many of you have heard before, the Trend is your Friend. Trading against it decreases the probability of your setup, and therefore cannot be called a High Probability setup. If it is within your Plan, always look to trade with the overall (Higher Timeframe) Trend.

The Entry Trigger: 

Now is the time to employ an entry system which can be used for every trade. Consistency here is key, as it determines the Risk to Reward of your trade. Lets say you’re trading the trend, and looking to Buy upon a pullback in an Bullish Trending market. Some areas of the trend are better to enter into than others, and offer better opportunities with better Risk to Reward.

Some Traders like to enter upon a Break and Retest of a Liquidity zone, or a trendline. Others like to look for a show of Bullish strength out of an area of High Value, such as Key Levels and Support and Resistance. If you’re a Price Action Trader, it’s also prudent to look for Patterns and Formations within price, which can help confirm and add value to your setup. For example, if you’re going long and a 4Hr Evening Star forms in your Area of Value, this can be used as an added confluence to support your Trade Idea. 

The Stop Loss

This part of the Trade Setup is probably the most vital so far. Managing Risk is one of the hardest parts of Trading, and one most new traders struggle with. It’s vital to have the correct conditions for your Stop Loss, and know that it’s protected above or below various confluences. These can consist of (but not limited to); Key Levels, Support or Resistance, Trendlines, Fib levels and Previous Highs or Lows. Most Traders tend to use 5-10 pips below the most recent Swing High or Low as a rule of thumb, but always be aware of other confluences to protect your Stop Loss with. Once the Size of the Stop Loss has been calculated, you can then work out your Risk which will determine your Risk to Reward Ratio. 

The Trade Target

Establishing a Target, or multiple Targets, for your trade setups are a must when considering taking profit. A Profit Target is based on something tangible and measurable, not feeling or personal opinion. Here it is prudent to mark out areas of possible reversal on the chart (things which stand in the way of price). Areas to look to take profit can be things such as previous Market Structure, Formations or Patterns & Key Levels. 

If you’re trading a highly volatile market, such as Bitcoin or other Cryptocurrencies, it’s recommended you use Trailing Stop trade setups, which follows current price by a range of pips (usually 20-40, or an EMA). This avoids you sitting at the charts and updating your Stop when the market moves, and also allows the position to be taken out if in profit if price aggressively reverses. The areas marked with dotted lines on the image above show areas of Structure, within which it may be advisable to take partial or full profit.