Tips for a Better Trade Setup

Successful traders know that trading can’t simply be about buying or selling and hoping for the best. To have a chance of success, traders must always consider risk management and constantly fine-tune their skills knowing that trade entry and exits are some of the most important keys to trading.


Trade setups can have a significant impact on a position, and need to be approached with a large degree of precision. Although anyone can buy a market that’s trending higher or sell a market that’s trending lower, such simplicity will have little, if any, chance of success. While potential trade setups can vary based on the methodologies used as well as risk tolerance, here are a few simple tips when looking for strong setups:


  1. Only consider trade setups that present a good risk versus reward: While this may seem like a no-brainer, traders oftentimes forget to consider this. For example, it doesn’t make a lot of sense to risk $.25 on a corn trade if the potential profit target is only $.25. Risking $.25 while looking for a $1.00 move, however, presents a much more favorable risk/reward scenario. While there are no hard rules regarding this, a simple rule of thumb may be to only consider trade setups where there is a minimum risk/reward of 4:1.


  1. Focus on setups that are part of your methodology: Some traders go long or short based on moving averages, while others may use the RSI or stochastics to buy or sell. Whatever your strategy is, and whatever technical tools you prefer to use, stick with them. A trend trader should focus on entering trending markets. A counter-trend trader should focus on entries that are counter to the larger trend. Pick a single methodology or a small handful of strategies and stick with them.


  1. Look to enter trades with precision: Entering a trade at precise price levels may potentially help mitigate risk and potentially improve trade outcomes. If you have determined that there is a strong area of support in the mini-SP from 2400-2410 and you are looking to buy, avoid buying unless price touches the area. Going a step further, you could even look to buy only if price nears the bottom of the range near 2400. Precise trade setups may allow you to have closer stop orders.


  1. Consider setups only in the direction of the larger trend: A very simple way to potentially boost the odds of a successful trade are to trade in the direction of the larger trend. If you are looking to enter a swing trade in T-bonds, look to get long on pullbacks or short on rallies. Trading with the larger trend, such as daily or weekly for swing trades, may keep you on the path of least resistance and potentially boost winning percentage. Not only that, but trading in the direction of the trend may also potentially improve trade outcomes.


Although trade setups may vary based on factors such as preferred methodologies and risk tolerance, following some of the simple tips outlined above can potentially improve trade performance while reducing risk. It is important to keep in mind, however, that precise trading may mean some trades are missed. That is OK. While some winners may be missed, a whole lot more losers will also be avoided. Trade setups are like buses, there is always another one right around the corner.


There is a substantial risk of loss in trading futures, options and forex.  Past performance is not necessarily indicative of future results.