When you are day or swing trading stocks as a source of income, having the proper resources and tools to make decisions accurately over time is crucial. Many of the most profitable moves or savviest opportunities are made by identifying the specific criteria for taking a trade – otherwise known as a setup.

If you are not up to speed on high-probability setups and take a trade that has too much risk, you can get burned badly. We’re here to make sure that traders are aware of several consistent trading setups they can use without jeopardizing any more capital than they have to. Read along to see if you are familiar with these trading setups.

What is a Trading Setup?

A trading setup is a pattern or market condition on a chart that lets you read whether a stock is more likely to break to the upside or downside. You can and should learn to read price action which will tell you the larger story.

Trading Set-up

These setups are not guarantees; all stocks are affected by human psychology, the market environment, and any catalysts that happen within the time of your move. However, there are setups that have proven to be reliable for decades in any sector of any market that the best trading professionals rely on consistently. 

Put simply, a setup is your cue to look for an entry into a trade. It doesn’t mean you will always enter; the best traders are content to pass on entries until their setup yields the best set of circumstances. However, if you aren’t proficient at reading setups, you are unlikely to find profitably either.

Types of Trading Setups

Regardless of the stock, you are going to be looking for patterns that let you identify common trends. We teach our students to identify trades using our OVERT system. which can be used in the following setup scenarios:

how to start day trading

  • Trend Continuation: This pattern will imply that the price will continue to move with the price action and volume it has shown most recently on the chart. Keep in mind that not all continuation patterns will result in the trend sustaining.
  • Reversals:  Contrary to a continuation, this is when the trend reverses. These can be some of the most lucrative setups if you know how to time your entry. This is a tricky setup, so we advise newer traders to avoid attempting to buy bottoms and sell tops without the proper understanding of price action.
  • Range-Bound Securities: These can be some of the most consistent moves for new and experienced traders alike. When there are no significant trends forming in the overall market, you can identify support and resistance in a range. The stock price will reliably oscillate between these, so once you have identified this range, you can buy low and sell high. Most investors dislike this market condition but for an educated trader, the range is an ideal market scenario.
  • Breakouts: A breakout setup happens after a period of accumulation or distribution has completed and the market is ready to trend again. While they offer good potential profits, they can be tricky to enter and lead to many force signals often known as fake-outs.
using a trading setup

These are just four of the many types of trading setups that can be used. At StockAbility we help you develop strategies that suit your trading style and bring you consistent good entries. It is important to remember that not all setups are exclusive- you can have elements of a trend that ultimately breaks out, for example. Even more crucial is to acknowledge that a setup is not a guarantee and that even if you stick to your trading plan you might have to accept an outcome that is not perfect. However, over the long run in day or swing trading, if you are taking good setups with proper entries, you increase your chances of success.

Learn Setups and Analysis with StockAbility

At StockAbility, our goal is to provide financial freedom via trading for our community members. Learning proper setups is one of the first steps in your market education, and our individualized courses will help you be a more confident and successful trader without having to burn money while guessing at how to trade.

If you are looking to catapult your trading career and capitalize on the opportunities the stock market provides, sign up for a free webinar – it might just lead to a more financially successful tomorrow.