Setups

What have you been working on recently?

My focus has been setups.

That is how to recognise better a setup—and how to enter from that setup.

As a price action trader, I’m looking at high to low timeframes to identify a trend and qualify my breakout trade entry.

Nothing too complicated. We look for trend setups utilising high/low-one entries and, more often, high/low-two breaks.

Practised knowledge of price action is essential too.

From the chart below, we can see how volume, when presented on the y-axis, affects the price.

Currency pairings—unlike stocks—are decentralised.

The volume in this instance is a representation from a single liquidity provider.

But it is sufficient to show how high-volume consolidation levels are often formed and become a support or resistance zone.

A zone from which we can determine a setup and consequently an eventual breakout.

The reason we need a setup rather than just a break of a level is the propensity for false indications.

A setup and an understanding of the market structure and other traders’ probable intention strengthens our trade entry.

By determining where traders’ stops and targets are, we can anticipate the subsequent market reaction when the price hits those levels.

Even news events often follow a technical path.

We realise that we need to be focused and highly familiar with all aspects of a (single) pairing.

Even though we trade together—via Microsoft Teams—James as the analyst and me as the trader, we find more than one pairing to be too much.

Which will seem odd to those traders—and that was us not so long ago—that view a dozen or so pairings at a time.

My only reply is to try a single pairing with very selective setups and see if P&L improves.

It helps if the selected pairing has one currency that is open and the other closed.

For example, EUR/USD at New York open would have both currencies simultaneously active and therefore wouldn’t be a suitable pairing for us.

Moreover, like us, focus on a single volume session. Our preference is a couple of hours on either side of the New York open time.

Managing risk is a skill and needs—but is rarely given—as much if not more thought than the setups and entries.

Don’t forget awareness of over-trading. That is essential too.