Trade Setup

A setup is a pattern of conditions, not a single candle and not a feeling that a name looks good. A complete setup names the context, for example an uptrend on the daily chart, the location, a pullback to a level, the trigger, a hold and a reclaim, the invalidation, a break of the level, and the target, the prior high. If any of those is missing, you have an idea. Ideas can be traded by people with years of notes. They cannot be improved, because you cannot count them. A setup you can count can be wrong in a way you can see, and that is what makes it valuable.

Write the setup in one paragraph before you take it live, and take only trades that match the paragraph for a fixed sample, twenty or thirty, not two. During the sample you will see versions you wish you had included. Write them in a list. Do not add them mid-sample. At the end, separate the trades that matched from the trades you talked yourself into. The second list is usually where the damage is. Give the setup a name you will still recognise in six months. "The one I like" is not a name.

Require the setup to do one job. A breakout setup and a fade setup that can both fire on the same bar will, and you will pick the one that fits your mood. If two setups conflict, the context rule has to say which one is allowed. Use a checklist that takes less than a minute. A checklist that takes ten will be skipped when the market is moving, which is the only time it was needed. If you cannot check it quickly, the setup is not specified. It is a speech.

Collecting setups until every bar is a setup. Also changing the definition after a loser so that the loser "does not count." And copying a named setup from a book without the timeframe and the market it was written for. A flag on a weekly index and a flag on a one-minute illiquid stock are not the same trade just because both look like a flag.

A well-specified setup can still have no edge. Specification is the minimum, not the proof. Small samples will flatter you. A setup also decays when everyone trades the same obvious version, or when the regime changes. The journal is the tool that tells you the payoff has changed. The setup will not announce it. And no setup includes the news that is about to invalidate the level. Event risk is a separate line in the checklist.