“Ray,

We hear all the time that successful traders know when a high probability trade is “setting up”. My question is what is it that you look for as a set up for a trade?”

This was an interesting question, because in trying to answer it, I realized that while I thought I had totally different mental processes going on between day trading and position trading… the ’setups’ I was looking for were essentially the same.

Let me explain…

First off, regardless of the timeframe you’re trading, I think it’s vital to have an idea of what’s going on in other timeframes.

In other words, you need the big picture. So if you’re trading 5 mintue charts, have an idea what’s going on in the 1 hour and daily charts. If you trade the daily charts, know what’s going on in the weekly and monthly charts.

The reason for this is that while I may say that the doji is a great candlestick setup, just trading a doji in isolation could be very dangerous especially if on a higher trading timeframe that doji is running against major opposition.

Secondly know and watch your key support/resistance levels.

When trade I look for where key support/resistance points are, and create various scenarios that may play out. I then watch price and how it reacts around these key levels.

At this point this is where my day trading and position trading approaches begin to differ.

When day trading, many times I expect support/resistance to hold up, and will look to trade with the support/resistance as my stoploss. Basically meaning that (depending on the context of the trade in progress) if price reaches a support level I deem important, I’ll go long, and use the support price level as my bail out point.

While when position trading, I usually choose to not trade with support and resistance, but against it… meaning that I look to trade longer term trends when support and resistance points fail.

Obviously these paint fairly broad generalizations as it is impossible to address every market condition with a general article, but I hope this gives you an idea of why just looking for a setup, in the traditional sense, is just part of the picture.

I know the reader asking the original question was probably looking for a more definitive answer, like, “I look to trade of dojis and falling hammers…” but what you have to realize is that while these trading patterns do help to alert us to potential changes in market sentiment, that used in isolation they only give us one side of the picture. By learning to understand what is going on in price action and the context to which it is occuring, you’ll be less in need of specific setups, and more in tune with the market.

Continued Success!
Ray

P.S. For more info on how I position trade, check out Market-Millions.com.

For more info on how I day trade, check out Day-Trading-Secrets-Revealed.com

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