“I’m creating a trading method, but I can’t seem to make winning rules. ……”
Maybe that is because the way you create your trading methods is wrong.
In this article, we will explain in detail and practically how to create a setup, which is an important component of a trading method, for those of you who are struggling with creating a trading method for Forex.
By reading this article, you will be able to understand the actual process of making rules for the dominance of FX price movements and you will be able to make the key components of your trading methods.
- What is setup?
- There are many components that make up a forex trading method
- Advantages of Using Setups in Forex
- Basic Concept of Setup
- Learn from specific examples of setups, “How to Create Setup Rules”
- Elements of Setup (1) “Support and Resistance Lines”
- Element of Setup (2) “Technical Indicators (Indicators)
- Setup Element (3) “Price Action”
- Combine each element to create a setup
- You don’t need magic to set up forex
- The meaning and making of the setup – summary
What is setup?
A setup is one of the components of a Forex trading methodology, and is a set of “conditions” that identify the appropriate circumstances for a trade.
To be precise, it is called a “setup rule.
Simply put, a setup is a set of rules that defines “under what circumstances is a trade appropriate?” In simple terms, a setup is a set of rules that defines “what kind of situation is appropriate to trade in.
Setup rules are a set of rules that define a series of trading decisions in Forex: recognizing the market environment, analyzing the background, and formulating a trading strategy.
In the Forex market, when the conditions are met and a trade can be executed, it is called “setup is executed,” “setup is in place,” or “setup is satisfied.
In actual trading, once the setup is established (conditions are met), the next step is to determine whether the entry timing conditions are met.
When these “entry timing conditions” are met, we take a position, and these conditions are called “triggers” (trigger rules).
In this article, we will explain the important “setups” among the elements of these trading methods.
Please refer to the article below for a detailed explanation of triggers, and read it in conjunction with this article on setups.
There are many components that make up a forex trading method
Before we tell you more about setups, let’s review a little about forex trading techniques as a whole.
When it comes to forex trading techniques, people generally tend to focus only on where to enter the market.
However, rules for entry are only one component of forex trading techniques.
In addition to entry rules, there are also rules for recognizing the forex market environment and analyzing the background, “settlement rules” for taking profit and cutting losses, and “position size rules” for risk management, all of which are interrelated with each other.
Furthermore, a trading method is not limited to making entries and exits on a chart.
It is also about the trading environment, time of day, and self-management (self-observation and mental management) while trading.
The article below explains the important rules in Forex trading other than entry and settlement, which can be useful in creating a Forex trading method.
As explained earlier, the “setup” explained here belongs to the market environment recognition and background analysis rules within the overall FX rules.
In other words, please keep in mind that “setup” is used to “set up before entry”.
Advantages of Using Setups in Forex
Now, setups are one of the components of the Forex trading methodology and are rules that are used prior to actually taking a position to determine if the current market conditions are suitable for a trade.
Put another way, you do not trade unless the setup conditions are met.
The word “setup” may sound like a special rule, but in fact, you may already be familiar with it in your everyday forex trading.
For example, suppose you have a simple trading method (entry rule) like the following
- The daily 25 MA (moving average) is rising,
- If the rate is above the daily MA (bull position),
- Enter on the hourly MACD sign (golden cross).
In this case, the setups correspond to (1) “daily 25MA rising” and (2) “rate in bull position”.
In other words, the first important point is “whether the daily conditions are met,” and unless the daily conditions are met, the setup is not to trade no matter how many signs appear on the hourly time frame.
Thanks to this setup, we can avoid the “common mistake” of being swayed by immediate price movements and repeatedly making unnecessary entries.
This is one of the major advantages of using setups in Forex trading.
What would happen if the simple trading technique described above did not have a daily setup?
You would keep your eyes on the hourly MACD, buying and selling every time the MACD sign appeared, and you would most likely end up with a total loss.
There are many causes of “Positive Positive Disease,” which is one of the most common problems of beginner forex traders, but one of the major factors is that they all seem to be entry opportunities.
By clarifying setups, you can have a criterion that says, “This is not an entry point,” which increases the probability of alleviating the “Posi-Posi Disease.
In other words, by having a clear setup and background analysis, you can maintain your concentration, stand firm, and determine the most advantageous trade timing.
Once the setup is in place, you can then concentrate on your entry, and you will not have to keep wondering if you should trade or not.
Basic Concept of Setup
A setup is “what kind of chart situation do I trade in?” This is a clarification of “under what kind of chart conditions do I trade?
By identifying in advance the situations in which it is advantageous to buy and trade in such market conditions, you will be able to repeatedly trade the Forex market over the long term without blurring the lines.
The question then becomes, what is an “advantageous situation”?
To answer the question, a dominant charting situation is “a situation in which many traders’ actions are biased toward one side or the other, selling or buying.
Explanation What is FX “superiority”? Examples of trading methods and how to make them are explained
We will condition such market conditions with setup rules.
If we clarify the conditions of advantage with reproducible rules and enter only under those conditions, basically, the more we repeat the situation, the easier it will be to remain profitable.
Don’t try to get the right answer out of the blue
When I talk about this kind of thing, beginning traders, especially novice traders, tend to say, “Well, I want to know the market conditions that give me that advantage! and they tend to try to find the correct answer out of the blue.
Certainly, there is a general tendency in the foreign exchange market to have an advantageous situation.
However, in order to take advantage of the superiority on the chart and actually generate profit, the combination with other rules of the trading method (such as triggers and settlement rules) is very much involved.
Therefore, it is necessary to first verify whether the setup has an advantage, and then further verify it using what you have put together as a trading method from there.
Note that if you skip this verification process in pursuit of the “right setup,” you will fall into the so-called “trap of searching for the Holy Grail”.
When you try out a trading method and it doesn’t work or you lose even a little bit, you immediately start looking for another trading method.
If you continue to wander through the labyrinth of trading methods thinking, “There must be a better method” or “If the method is good enough, I should be able to win,” you will never realize the importance of verification and the value of the “gem” of a good method you have at hand. If you continue to wander in the labyrinth of trading methods, you will never realize the importance of verification.
Although many people tend to get defensive when they hear the word “FX verification,” the reality is that it is a series of simple tasks, and it is not something that is particularly difficult or requires a high degree of precision.
Like a bicycle or stilts, it is one of those things that anyone can learn to ride while falling down. Please refer to the article on specific verification methods below and practice it little by little.
Learn from specific examples of setups, “How to Create Setup Rules”
We will now explain how to create setup rules, covering specific setups based on reproducible advantages used in the environmental awareness and background analysis of discretionary FX trading.
We will cover the individual setup elements in turn and then explain the integration of these elements.
For simplicity, we will use daily and four-hour charts of major currencies such as the dollar-yen and the euro-dollar, but any time frame can be used.
What is important in recognizing the environment is the “relationship” between the time frame (execution time frame) and the chart above it.
For example, it is not useless to trade on a 15-minute chart and check the setup on a 30-minute chart, but it is appropriate to use the 1-hour, 4-hour, or daily chart in combination with the 15-minute chart.
Elements of Setup (1) “Support and Resistance Lines”
The basis of a setup in a dominant trading method is to identify a situation that is biased toward selling or buying and to articulate it in a reproducible manner.
Therefore, the first and foremost elements used in setups are support and resistance lines.
For example, near support lines, it is said that buying support, follow-on buying entries, and even profit-taking by traders who had been selling are likely to occur.
Therefore, we will use this “advantage in the buying direction” as a setup condition (the opposite is true in the case of resistance lines).
“A” is a point that takes advantage of the “buying advantage at the lower end of the range.
“B” is the point where the resistance line was broken through and then turned into a support line by a roll reversal.
“C” is the point at which the price breaks below “B” and reaches a push-low.
First, when the rate reaches these points in the upper time frame – for example, the daily time frame – we consider that the setup has been executed.
Next, we consider a buy trade (waiting for the trigger condition to be met) on the time chart (e.g., hourly) where we will actually execute the trade.
For more information on support, resistance, and roll reversal, as well as the range market, please refer to the following articles.
The chart below is a daily chart of the Eurodollar. The point where the setup was established is circled in red.
*Click to enlarge.
In a situation where the rate reaches the point circled in red on the daily chart, it is possible to increase the probability of making a total profit by trading in the “reversal direction from the daily high-low line” on the hourly chart, for example (using a separate trigger rule for entry).
Needless to say, however, this is a probabilistic trend and is not absolute.
The results will vary depending on the actual entry timing and settlement (this is true for all setup elements).
Now, if you look closely at the chart of these upper time frames, you can find many points where setups have been established.
It is up to the discretion of each trader to look at these setups in detail.
For example, if the candlestick is enlarged on the chart, the following setup points can be seen.
Click to enlarge.
What is important here is how many traders (large traders who are moving large amounts of money) are paying attention to this point.
By asking the question, “Does everyone (large traders) recognize this line (chart point)?” By asking this question, you can avoid the positives and negatives of complacent decisions (which is common to all setups).
Similarly, “trend lines” can be used
Trendlines can also be used as setup elements, although they are more difficult to handle in terms of reproducibility than support and resistance lines.
As with support and resistance lines, reversal and roll reversal at the line are basically used as setup conditions.
However, unlike support and resistance lines, there can be a large discrepancy between traders’ interpretations of the lines.
In other words, it is difficult to draw a trend line that is likely to be watched by a large number of market participants.
Despite these drawbacks, however, if a trend line can be easily drawn, it is expected to attract more attention, so it can be used as a supplemental rule within a setup.
Element of Setup (2) “Technical Indicators (Indicators)
When using “technical indicators” as a component of setups, please note that using various technical indicators in the dark will not give you an advantage.
There is a widespread belief that “technical indicators are the method itself” when it comes to trading techniques.
However, technical indicators are only calculations of price movements themselves (candlesticks), and they “visualize” the trend of price movements.
In other words, to put it another way, technical indicators themselves are not necessarily superior, nor can they be said to “win by using this technical indicator.
Based on such considerations, what is important is, as mentioned earlier, “how many traders (large traders who are moving large amounts of money) are paying attention to it.
For example, if you use moving averages in FX, it is appropriate to use MAs with popular settings such as 20-, 25-, 50-, and 200-period MAs, and if you use MACD, it is recommended to leave the parameters at their default values.
The important thing is not to try to get the technical indicator to give you a sign, but to understand what kind of advantage the technical indicator is trying to capture.
For example, when using moving averages, instead of simply trying to get a sign that says “buy if the MA is rising,” you should understand what kind of advantage the fact that the MA is rising indicates there, and create setup rules based on that understanding.
When moving averages (MAs) are used for setups
To begin with, a moving average is the average closing price over a period of time plotted (drawn) on a chart.
In the case of a 20MA, the line is the average of the closing prices for the past 20 periods from that point.
Now, what can we see from this?
First, we can see that the current rate is above the 20MA (in a bull position), which tells us the following
What we can see from the current rate being above the 20 MA
- Most traders who had “buy positions” during the past 20 periods have “unrealized gains”.
- Most of the traders who had “Sell Positions” during the past 20 periods have “Unrealized Losses”.
In addition, we can see from the fact that the 20MA is rising that
What the rising 20MA shows
- The average rate at which trades are made continues to rise with each passing period.
- There continue to be more traders buying than selling.
- In other words, there continue to be more new buys and sellers cutting their losses (i.e., buying) than buyers taking profits (i.e., selling) and new sells.
From these we can derive that there is an advantage to choosing a buy trade (holding a buy position) when “the current rate is above the rising moving average”.
Based on this, it is possible to create a setup that looks like this, for example
Setup Example
- If the hourly 20 MA is rising and the rate is above the MA (bull position), choose to only enter a buy entry and not trade a sell.
- If the 1-hour 20 MA is rising and the rate is below the MA (bear position), do not trade.
This example is a fairly conservative and defensive setup, but the rule is worth it in terms of narrowing down market conditions worth trading.
It is important to note that the setup is “preparation for entry,” and that just because the setup conditions are met does not mean that the trade (entry) will be made immediately.
In order to actually enter a trade, further entry conditions (trigger rules) must be met.
Again, the setup is one of the components of a trading method, and is a rule to determine whether the market conditions are suitable for trading.
The key to using technical indicators is to understand their superiority and create setups accordingly.
If you simply memorize and use them as signs, such as “buy because the exchange rate is above the MA” or “buy because the MA is rising,” you will not be able to achieve a total positive result.
Such usage will lead to hesitation and hesitation in front of the chart.
You will be at the mercy of the slightest movement of MAs and end up wasting a lot of trades in a market situation where you have no advantage.
To avoid this, make sure you understand what kind of advantage (bias in trading) you are trying to capture with technical indicators.
Setup Element (3) “Price Action”
Price action refers to “FX rate movements (price movements) themselves,” specifically, “candlestick shapes and combinations” and “chart patterns”.
Unlike technical indicators, price action is not processed by calculations, and the buying and selling behavior of market participants is immediately reflected on the chart.
Therefore, by focusing on price action and recognizing the environment, you can respond to the situation most quickly.
Because of these excellent characteristics, there are cases where all the elements of a trading method are composed of price action.
Let us introduce some of the most characteristic price actions used in setups.
Pin bar (candlestick with long whiskers)
A pin bar is a candlestick with a small substance and a long whisker.
It represents the fact that the exchange rate once moved up or down significantly, but was pushed back strongly from there, “negating the initial price action.
For example, from the price action of a “pin bar with lower whiskers,” in which long lower whiskers appear, we can read the following (the opposite is true for a pin bar with upper whiskers).
What we can read from the “lower mustache pin bar.”
- At one point, the rate fell vigorously to the tip of the whiskers.
─ ─ In other words, strong selling forces were present. - The rate was pushed back up with even stronger force than that momentum.
─ ─ In other words, there were even stronger buying forces beyond the tip of the mustache. - The selling forces are disheartened by the fact that the entire range of prices that fell so vigorously has been pushed back.
- In other words, it is difficult to get in the mood to push back again.
From this, we can see that once the pin bar with the lower whiskers appears, then there is an advantage to the buy trade.
And based on that, it is possible to create setups like the following, for example.
Setup Example
- If a lower-bearded pin bar appears on the previous day’s candle on the daily leg, consider a buy trade for the day.
- When the daily candle is in the above “1” situation, even if an upward-bearded pin bar appears on the hourly candle, we would not take a sell trade.
Furthermore, in addition to this pin bar, price actions (candlestick shapes) such as “Wrapping Legs,” “Harami Legs,” “Long Lines (Big Sun Lines and Big Yin Lines),” and “Crosshairs (simultaneous legs)” can be combined to form very effective setups.
These “combined price actions” also have “price movement backgrounds” where such candlesticks appeared.
Let’s take advantage of the superiority (trading bias) while reading such “background of price movements”.
As an example, the following is a price action in the form of a “Harami” (harami) leg followed by a pin bar.
When this price action is broken down and expanded, it can be seen that the price has gone from a localized rise to a triangle and then to a “pause in the rise” (right side of the figure).
In other words, if the price action moves higher after this, there is a high probability that the price will continue to rise, so if this price action appears, considering a buy trade is considered an advantageous trade.
Please refer to the article below to learn more about this type of price action if you want to learn more about FX price action.
Double tops and double bottoms
The leading chart patterns used in setups are the “double top” and “double bottom”. Some simple trading methods even use only these chart patterns.
In the case of the Double Top, the “shape of the two peaks” indicates that the price reached the previous high and attempted to renew the high, but was blocked by strong selling forces and reversed.
Once the rate breaks through the neckline, the mood among market participants tends to begin to change to one of, “Can’t we go higher now?” When the price breaks through the neckline, the mood of market participants tends to change to “Will the price go up anymore?
Although a double-top may break to a new high and rise again, without the support of the upper time frames, the market tends to reverse or go through a temporary range.
For more details on double tops and double bottoms, please refer to the article below, which explains in detail the psychology of market participants and can be used as a reference for creating trading methods.
Now, from these price trends, we can read the following
What we can read from the “neckline breakout”
- Once the neckline is breached, the possibility that the previous price movement will not continue increases.
- If the neckline is breached, the possibility of a reversal of the price movement is created.
This makes it possible to use price movements through the neckline to create setups such as the following
Setup Example
- If a double top forms on the hourly and breaks below the neckline, consider a sell trade.
- If a double top forms on the hourly and breaks below the neckline, I would not take a buy trade.
This setup alone may seem obvious, but as explained earlier, it is important to understand the background of the price action and the advantages that come from it.
By doing so, we can identify “double tops that are likely to be recognized by many traders,” and conversely, we can prevent ourselves from falling into “complacent judgments.
Rounding up and down of highs and lows
The basic and essential element of price action in FX trading is this “rounding up and down of highs and lows”.
As shown in the figure, a trend condition is one in which the price continues to rise and fall in one direction.
This is known as the “Dow Theory definition of a trend,” and is one of the common understandings among many FX traders.
Definition of trend by Dow Theory
- Uptrend = High price is rising and low price is also rising.
- Descending trend = the low price is falling and the high price is also falling.
If your understanding of Dow Theory and trends is unclear, please refer to the article below for a detailed explanation.
Now, what we can learn from this rounding up and down of highs and lows is as follows.
What we can learn from the “rounding up and down of highs and lows.”
- The fact that the high and low prices have rounded up indicates that buying forces are stronger than selling forces (more traders (in terms of number and amount of money) are buying than selling traders).
- The high and low prices have fallen, indicating that the selling forces are stronger than the buying forces.
From these, we can say that in a situation where the high and low are rounding up, there is an advantage in choosing a buy trade, and if they are rounding down, there is an advantage in a sell trade.
So, we can create the following setups.
Setup Example
- If the high and low are cutting up on the hourly time frame (seen as an uptrend in Dow Theory), consider a buy trade.
- If the high and low are cutting up on the hourly time frame (seen as an uptrend in Dow Theory), then do not take a sell trade.
Such setups can also be used as a complement or follow-up to other setup elements. It is also very useful to make it a condition that multiple time frames are rounded up or down at the same time.
In addition, since they can be flexibly applied to other elements of a trading method (triggers and settlement rules), we recommend that you pay attention to the rounding up and down of highs and lows on a regular basis and become accustomed to making such judgments.
Combine each element to create a setup
We have looked at various setup elements and will now explain how to combine these elements while creating specific setups for FX trading.
Although the setups I will be describing are practical and have accumulated advantages, please do not try to use these setups as is in real trading.
The total results will differ greatly depending on the entry and settlement rules, and you must first and foremost go through the process of verifying the setup by yourself to understand and agree whether it is truly superior and whether it can be repeated (is it reproducible?).
Now, there is a concept that is important when combining setup elements to accumulate advantages.
It is the “fractal structure”.
For more details, please read the article below, but in short, let’s create setups using the concept of multi-timeframe analysis.
In FX, setups are usually created in the following multiple timeframes
- Setup on a large time leg.
- Setup on a medium time leg.
- Setup on the time leg you trade.
For a detailed explanation of multi-timeframe analysis, see the article below.
Let’s start by looking at the setup on a larger time frame.
How to create setups with large time frames
Here, assuming day trading, the daily chart is used as a large time leg.
In the case of FX day trading, the daily chart may not seem to be relevant at first glance, but the larger time frame reflects the transactions of many market participants, so it attracts more attention, and sudden large price movements may occur near the daily chart points.
Therefore, it is important to have a setup in place in your trading method to take advantage of such price movement trends.
As a sample, please see the following setups.
Setup on daily chart (example)
- When the rate reaches near the daily support line, do not take a sell trade (the opposite is true for resistance).
- When the price reaches the daily “rising 20 MA,” do not trade to sell (the opposite is true for the falling 20 MA).
- If the daily 20MA is directionless (sideways), do not trade near the MA.
- If a pin bar appears on the previous day, do not trade in the direction of the tip of the whiskers on that day.
There are still others that could be mentioned, but the distinctive feature of each of these rules is that they define “conditions under which you will not trade”.
In a setup, clearly stating “do not trade in that chart situation” is also an important way to take advantage of an advantage.
By identifying in advance the situations where there is no advantage to trade (i.e., no trading bias occurs) or where there is a possibility of a reversal in a large time frame, unnecessary or risky trades can be avoided, thus reducing total losses and making it easier for profits to remain.
Thus, one meaningful style of “large time leg setups” in day trading is to establish “no trade” conditions.
How to create a setup with a medium time frame
The medium time frame for day trading in FX corresponds to the 4-hour to 1-hour chart, and the “trading strategy,” which is the heart of the trading method, is defined in this time frame setup.
The trading strategy starts with defining a “big framework,” such as whether to ride the trend (trend following) or to take the price movement to rebound in a range (contrarian), and then formulating rules for what kind of price movements to capture in the situation.
At this point, one should not be greedy and say, “Let’s create a setup (strategy) that can respond to any situation.
A setup created based on such a concept tends to become a complex and bizarre set of rules, and such a method will be extremely difficult to use in actual FX trading.
We recommend that you start with a simple trading strategy, such as trend-following or contrarian trading from the upper and lower bounds of a range, and work your way up to just one setup.
Once you have developed one setup, you will be able to develop new, simple setups for different chart situations.
So, as you repeat this process, try to gradually build up “multiple setups for various market conditions.
Specific examples of setups
Let’s consider the setup here using the 4-hour time frame.
The setup below is an example of how to accumulate advantage using the factors explained so far.
4-hour “buy” setup (example)
- (Required) The 4-hour 20MA is continuously rising and the rate is in a bull position.
- (Supplemental) A series of positive lines have appeared.
- (Supplemental) A long positive line has appeared.
- (Supplemental) A lower-bearded pin bar, a wrap-around leg, or a fluttering leg appeared.
- (Supplemental) The price is near the support line where a roll reversal has occurred.
- However, we will not consider a buy trade near the 4-hour resistance line (previous high).
This is a trading strategy that confirms an uptrend in the 4-hour time frame and tries to “buy” into the trend.
Here, the setup is considered successful if the required conditions are met and one or more supplementary conditions are met.
Key Points for Creating Setups
The key to creating a setup that will become a trading strategy is to clearly define the advantage that will be the axis of the strategy.
In the example of this setup, the axis is “the advantage that can be read from the moving average,” and unless this condition is met in the first place, no matter how favorable the price action is, we will not trade.
By setting such an axis, there is less hesitation during the actual trade, and it is easier to have a sense of stability in the trade.
Of course, if the verification results show that a particular price action is more advantageous than the moving average, then you can create a setup based on that price action.
For example, a setup that prioritizes “pin bars that appear in certain situations” is one advantage worth considering.
Let’s check it out on an actual chart
Now, the chart below shows the actual situation where this “buy” setup was fulfilled.
*Click to enlarge.
Basically, a buy setup is established where the 20MA is rising and the rate is in a bull position (above the MA), where a series of positive lines or a long positive line appears there. However, near the previous high, we will have to wait and see.
When the price action is supported by price action such as pinbars or harami, a buy setup will be established.
The points marked with pink circles are where buy setups were established during such adjustments or bearish situations.
Importance of setup as a trade strategy and its caveats
If you look at the chart while considering the setup in this way, you will see that it is easier to make a total profit by accumulating advantages and narrowing down the buy trade situation.
Along with that, you will naturally understand that it is dangerous to take a sell trade there.
If you don’t have a setup as a trading strategy, you will end up selling under these conditions without knowing what you are doing, and that will make it difficult to make a total profit.
Of course, there are many cases where setups are established but do not move in a straightforward manner.
However, that does not mean that the setup is useless, since it only means that what could have happened in probability has happened.
In fact, there are many cases in which the next “setup on the time chart to be traded” will cause the market to wait and see during such price movements. In this regard, please judge the superiority or inferiority of a setup based on the “how it looks in total”.
How to create a setup with the time frame you want to trade
Having established the “conditions not to trade” in the daily setup and the “trading strategy” in the 4-hour setup, the next step is to establish the setup for the time leg on which the trade will actually take place.
Incidentally, if the setup for the medium time leg is well-developed, there is no problem even if there is only a trigger rule for the time leg to trade.
As explained at the beginning of this article, it is “a condition that defines when to enter.
When the trigger condition is satisfied, you enter and take a position.
However, since the rule content is insufficient for this setup example, we will further define setups for the time frame in which the trade is to be made.
Specific examples of setups
In this case, we will employ the 15-minute leg as the time leg to trade and accumulate the following advantages.
15-minute “buy” setup (example)
- (Required A) The price is holding from a 15-minute uptrend (flag, pennant, rectangle, etc.).
- (Required B) Or, the price is above the neckline of a double bottom and the rate is above the 15-minute 20 MA (bull position) and the MA is flat or rising.
A setup is considered to have been established when one of the conditions “Mandatory A” or “Mandatory B” is satisfied.
The “Mandatory A” condition is based on the tendency of a range in an uptrend to break out in the direction of continuation.
The “Mandatory B” condition is intended to capture the reversal of a 4-hour level adjustment (push down), followed by a reversal back to the 4-hour trend direction, which uses the trend of “major trend continuity.
In addition, the “Essential B” condition adds the condition that the rate must be positioned above a sideways or rising MA to avoid a contrarian trade at the 15-minute level.
As shown in the chart above, the chart situation on the right should appear to have a higher likelihood of a reversal (i.e., no continuation of the downtrend) to many market participants, and such “mood and atmosphere” tends to be a source of “trading bias”. Therefore, the setting of such conditions should not be taken lightly.
The chart below shows a specific example of such a double bottom price movement.
*Click to enlarge.
This is a chart situation where there is a “push-buy advantage” in the upper hourly legs and we are waiting for the “Required B” setup to be in place in the 15-minute time frame. The pink, red, and blue circles respectively indicate the two lows of the double bottom.
At the point where the neckline “A” has been broken, the rate is in a bear position and the 20MA is still down to the downside to horizontal. After some turbulence, the price fell below the lows of the double bottom.
Where the neckline “B” or “C” was breached, the 20MA was continuously horizontal and went up from there.
You can check the past charts yourself for these trends.
Let’s see it on an actual chart
The chart below is a 15-minute chart in a situation where the upper time frame is continuously rising.
*Click to enlarge.
The red line is the neckline of the double bottom and the light blue line is the flag line. The setup is established when those lines are broken (exceeded).
Naturally, there are some cases where the setup does not extend even after it is established, but in total, you can see that it is easy to make a profit.
When to determine the break of a chart point
Incidentally, it is up to the trader to choose between “break at the close” and “break in real time. Both have their advantages and disadvantages, so it is difficult to say which one is better than the other.
The decision on how to judge the break is related to the timing of the setup, which in turn is related to the timing of the “trigger rule,” so it is necessary to decide while considering the overall performance of the trading method.
In the beginning, however, it is recommended that the break timing be selected when the candlestick closing price is confirmed.
This will make it easier to verify using past charts, and will also give you a mental advantage because you will be less panicky during trading practice and actual trading.
Enter the market according to the trigger rule once the setup is established
Once the setup is fulfilled on the 15-minute leg as well, we will be looking at the entry timing to take a position.
Since this is an article about setups, I will not go into the details of triggers, but I will just give you an overview of the triggers when a setup is met on the 15-minute leg as mentioned earlier.
If the “Mandatory A” condition is met, there should be a flag or pennant line, and entry is considered to be made on the price action of a breakout from that line.
There is also an idea to add a filter rule such as “MACD must be rising,” but basically, the more filter rules you add, the less actual trades you will have, so be careful.
Also, in the setup described here, the rule for the upper time frame is set to conservative, so it is reasonable to enter at the sign of another technical indicator without waiting for a breakout of the line on the 15-minute time frame (aggressive entry based on the expected breakout).
If the conditions of “Essential B” are met, it is not unreasonable to enter at the time the 15-minute setup is established, but it may be necessary to set a deeper stop-loss position. It would be more conservative to use some kind of price action trigger.
Remember, it is important to verify the process by using past charts, trading practice software, and demo trades to confirm the superiority of the triggers.
Please refer to the article below for a detailed explanation of triggers.
You don’t need magic to set up forex
Up to this point, we have listed specific setups and explained how to create them and what to look out for.
As you can see, each of the setup elements is nothing more than “ordinary technical analysis” that everyone has seen at least once, unless he/she is an extreme beginner in Forex.
In order to generate profits in Forex, you do not need secret technical indicators or outlandish analytical methods; you can do it by combining “simple advantages in accordance with market psychology” like this.
Moreover, by “setting up” with such a setup, a certain level of advantage can be secured at the point before entry.
Therefore, when you actually take a position, you can trade with a sense of mental stability that you will not lose a lot of money in total unless you make a big mistake in entry and settlement.
Of course, you will need to verify and practice trading by yourself, but please try to practice it little by little so that you can have a trading method with a reliable setup built in and win at Forex.
The meaning and making of the setup – summary
A setup is one of the components of a forex trading method, which defines the “conditions” for identifying the appropriate conditions for a forex trade.
It can be said to be a set of rules that govern a series of forex trading decisions, such as recognizing the market environment, conducting background analysis, and formulating a trading strategy.
Since setups are important rules for analyzing charts and developing trading strategies (scenarios), they must be thoroughly verified in advance.
If setups are ignored during a trade, or if the setups have no advantage in the first place, no matter how many entries are made there, they will not lead to total profit.
Setups should not be unnecessarily complicated or overly precise, but should be set up to be as reproducible (easy to repeat) as possible.
When creating a setup, it is recommended to target the rate movement (price movement) itself, to use technical indicators that many traders pay attention to as a reference (auxiliary), and to consider the collective psychology of market participants.
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