Identifying Trading Setups

So far we have learned to:

  1. Identify support, resistance, and consolidation areas
  2. Identify a trend

In this lesson, you hare going to learn to use the first two lessons to identify high probable trading setups.

There are two ways to do this:

  1. Look through hundreds of stocks one by one
  2. Use a scanner to filter stocks with the best setups

I have a broad list of stocks I like to trade. Most are in the technology space in some way and most have above average growth. Let’s say this is a list of 100 stocks I follow each day. I know where these stocks are on a daily chart at all times. I may not know if they increased or decreased on the day but I know what the chart looks like zoomed out and I know the sentiment around the ticker and sector.

If I spent 6 months away from the market, I’d make a list of 100 stocks I want to trade, and I’d create a watchlist. I’d go through each chart and add each chart with an established uptrend to a separate list. This knocks the list down to 70 tickers.

Now I have a list with only uptrends. What need to identify next are consolidation areas with clear support and resistance to give us good trade probability.

PFE below is in a strong uptrend, but price is extended from the EMAs, therefore, there is no consolidation and good risk/reward entry and exit.

What we are ultimately looking for is

  1. Uptrend (34>55 EMA)
    Note: The strongest uptrends have more EMAs in numerical order
  2. Consolidation close to EMAs
    Note: The closer price is to the EMAs, the greater the risk:reward ratio

By definition, price ALWAYS has to revert to the EMAs. Whether that means price has to pullback or rest (move sideways) and wait for EMAs to catch up, it doesn’t matter.

Remember money is lost in consolidation, and made in a trend. Especially when trading options.


Those last 3 sentences may be the most important 3 sentences in this entire course, along with the next one. Buying in consolidation in anticipation of a breakout “to get a better price” is going to blow up your account. That I promise.

Let’s take a look at some setups.

Above we have a PFE bull-flag on the daily. 10 days of consolidation and price is still above the 21-EMA. Notice the reversal candle which bounced well off the support trend line and 21-EMA. Price inched higher the two following days, suggesting a potential short-term bottom.

On the following day a get a full candle breakout, followed by nice follow-through.

Check out NET below. This one is a bit different since price is below the EMAs. Notice how strong the 34/55-EMA relationship still is though.

Next up, we have SE in a falling wedge of sorts.

Like I discussed in the EMA trend lesson, I don’t love using trend lines because they are can biased. Therefore, I use horizontal price levels for additional confirmation. I believe these more objective, but they work extremely well as pivot points. Pivot points are areas on a chart price either has to reject or break-through. This one played out extremely well the following day as you see below.



This NFLX chart below sums up a perfect

You can make a lot of money using this this trading strategy in a bull or smooth market (low volatility). When volatility increases, you’ll see many of these breakouts fail. In mu opinion, it is best to look for shorts using this same trend trading strategy, but in reverse. Some items to remember…

  • Consolidation is your friend when looking for setups, but your worst enemy when owning contracts as theta is working against you.
  • Don’t fight the trend. Shorts on bearish charts, longs on bullish charts.
  • Always zoom out. Support and resistance levels are stronger the bigger the timeframe. That means Weekly S/R > Daily S/R > Intraday S/R
  • 3/4 stocks will follow the market. Volatile market usually means declining prices. Volatility means uncertainty. Markets HATE uncertainty. Your stock is NOT 1/4.