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Finding setups


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Finding setups

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  #1 (permalink)
 ALC77 
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I keep hearing that a trader should just focus on no more than 4 or 5 setups. How does a new trader find setups to focus on?

If it's important, I'm probably going to trade the ES and only until about noon CST.

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  #3 (permalink)
 xplorer 
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ALC77 View Post
I keep hearing that a trader should just focus on no more than 4 or 5 setups. How does a new trader find setups to focus on?

If it's important, I'm probably going to trade the ES and only until about noon CST.

This thread could give you an idea to get you started with setups - it's not by any means a comprehensive list, but it can provide you with some food for thought, hopefully.

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  #4 (permalink)
 ALC77 
Texas, USA
 
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xplorer View Post
This thread could give you an idea to get you started with setups - it's not by any means a comprehensive list, but it can provide you with some food for thought, hopefully.

Wow @xplorer This is exactly the kind of direction I was hoping someone could point me in. THANK YOU!

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 xplorer 
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ALC77 View Post
Wow @xplorer This is exactly the kind of direction I was hoping someone could point me in. THANK YOU!

Pleasure

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  #6 (permalink)
 tpredictor 
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The question is whether organizing your trading around setups is better then organizing your trading around context and understanding. A setup is typically defined a specific set of conditions or rules for a trade entry. The problem with that definition is that it places it very close to a trading system without being a trading system. If you have a set of rules that can be traded profitably then why not just trade it as a system? If you do not then why do you need a set of rules? The alternative to "setups" is to learn to classify or identify the types of market activity that are most-likely to result from context and to use graybox strategies to help provide the structure and risk management.

As a clearer understanding as to what I'm referring too, if you identify the day as more likely to be range bound then you know too pretty much focus on certain types of trades, buying weakness or selling strength and using larger stop losses. On the other hand, if the market is more likely to trend then you would orchestrate your trades in a different fashion, smaller stops and larger targets and you'd want to buy strength or sell weakness. I think where "setups" can be more useful is in helping to execute better-- entries and exits. They can, also, help one to limit your trades.

Of course, you can say well there are trend setups or range setups -- in which case, the setup is coincident but not necessarily predictive of future market activity.

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  #7 (permalink)
Johnytalker
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tpredictor View Post
The question is whether organizing your trading around setups is better then organizing your trading around context and understanding. A setup is typically defined a specific set of conditions or rules for a trade entry. The problem with that definition is that it places it very close to a trading system without being a trading system. If you have a set of rules that can be traded profitably then why not just trade it as a system? If you do not then why do you need a set of rules? The alternative to "setups" is to learn to classify or identify the types of market activity that are most-likely to result from context and to use graybox strategies to help provide the structure and risk management.

As a clearer understanding as to what I'm referring too, if you identify the day as more likely to be range bound then you know too pretty much focus on certain types of trades, buying weakness or selling strength and using larger stop losses. On the other hand, if the market is more likely to trend then you would orchestrate your trades in a different fashion, smaller stops and larger targets and you'd want to buy strength or sell weakness. I think where "setups" can be more useful is in helping to execute better-- entries and exits. They can, also, help one to limit your trades.

Of course, you can say well there are trend setups or range setups -- in which case, the setup is coincident but not necessarily predictive of future market activity.

Can you please explain the difference between setup and system.

Thanks,
Johny

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  #8 (permalink)
 tpredictor 
North Carolina
 
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Johnytalker View Post
Can you please explain the difference between setup and system.

Thanks,
Johny

A quantitative/systematic system (system in the context I used it) is a set of quantified rules that have been historically validated to produce a profit. Because the rules are fully quantified, the computer generates the entry and the exit. All the work and creativity was did in the backend and the execution, whether automated or manual, is just a mechanical operation.

A setup on the other hand is a description of the conditions, rules, that a discretionary trader will take depending on the market context. Setups may either be entirely descriptive or weakly predictive but generally the discretionary trader relies on context in order to determine what setups to take. This referring to context generally is used an analog to describe a combination of complex super conscious processing and more traditional linear processing that the short term trader uses.

For example, if a trader gets an intuition the market should be range bound then the trader may wait for a the setup of a double bottom to execute on that intuition. The double bottom may have provided some slight edge in the scenario where the market was range bound but would not normally be construed as an edge. Generally, short term traders predominately use a form of processing known as "implicit" or non conscious processing, often described as "pattern recognition". It is a mix though. There are some rules.

It may be helpful to elucidate the types of cognition that successful traders use:

Fake or Quasi Rules Based Trading
This is a form of trading that I suspect is most likely to produce failure. It involves following rules that haven't been rigorously backtested. These rules are often promoted by vendors to try to make trading seem like a simple or easy process. Also, visual chart mining can fall into this category.

Market Processing aka Active Cognition
This style of trading is characterized by actively processing market generated data. The focus is not on rules but identifying overall market characteristics and patterns. The style is largely intuitive and implicit and real-time. The edges, profit factor, will be small. Trade fees will be important. What is important is that the cognitive processes are too complex to be fully described verbally -- though at least a portion of the activity should be conscious.

Systematic Synthesis
This is a style of trading that involves intimate knowledge of historical biases and trading those historical biases based on weighting. This style tends to only work on medium time frame -- 1 day to a few days at minimum because of both the time to integrate the data and the wavelengths/frequencies of the data used. However, it can be more difficult to improve typical systematic edges using discretion because of complex set of variables working against the trader. First, these patterns tend to occur less frequently which makes it more difficult to use the "super normal" processing power that implicit learning offers on shorter term patterns. Second, the profit factor is already high which makes the opportunity cost of being wrong greater.

Quantitative System
A set of rules for entry/exit that have been rigorously validated and do not require any discretion.

Graybox
Mix of discretion and systematic.

Opportunistic Synthesis
All of the above styles more or less still rely on REPEATABLE predictable market events. Notice we can have NON repeatable PREDICTABLE market events. Opportunistic synthesis trading is a form of cognition that focuses on non repeatable but predictable market events. While not a trading example, if one had the insight to see that odds would narrow in Mayweather vs Mcgregor fight, they could have bet on McGregor when the spread was wide and hedged their bet when the spread narrowed.

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  #9 (permalink)
zazo
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Posts: 7 since Oct 2017
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My favorite set-ups are wedges either rising or falling on the small time frames, but i care more about where the daily timeframe s/r are

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