4 Types Of Basic Trade Setups (2024)

By Galen Woods‐3min read

Basic trade setups can be classified into 4 types: continuation, reversal, range-bound, and breakout. Each trade setup is used in different market contexts.

Understanding the different types of trade setups is immensely useful. It is an easy way to improve your trading performance regardless of your strategy. There are four types of basic trade setups:

  1. Continuation
  2. Reversal
  3. Range-bound
  4. Break-out

Trade Setups for Trending Markets

#1: Continuation Trade Setup

A continuation trade setup finds a chance to join an existing trend. It profits as the trend continues. This basic trade setup has at least two parts to it:

  1. Identify a trend
  2. Identify a pause in trend for trade entry

The 9/30 trading setup is a classic example of a continuation trade setup. It uses two moving averages to find the market direction and pinpoint the entry.

#2: Reversal Trade Setup

A trend either continues or reverses.

Similar to a continuation trade, we must have an existing trend before looking for a reversal trade setup. However, instead of entering with the trend, we are looking for a reversal.

Reversal trades have low hit rate but very high potential rewards. Hence, for reversal trades, let your profits run.

The popular trend following systems are examples of reversal trading. As they try to follow trends, they reverse their position with each reversal signal their system gives.

More: Trend Trading Strategies

Trade Setups for Ranging Market

#3: Range-bound Trade Setup

What if the market is not trending? What if the market is stuck in a range?

In that case, a range-bound strategy is ideal. In short, we buy low and sell high within the range.

As long as the trading range does not break out into a trend, such trading setups have a high win rate. However, as our profit target is most within the trading range, each trade gives a small profit.

Oscillators like stochastics and CCI are very useful for range-bound trading setups.

Learn: Use Gimmee Bars to Trade Range-Bound Markets

#4: Breakout Trade Setup

Eventually, all range-bound markets resolve into new trends. A breakout trade setup tries to capture the break-out of a range to profit from the birth of a new trend.

As most breakout attempts fail, a breakout trade is a low probability trade. However, it remains popular as the chance to catch a new trend is too enticing for most traders.

The squeeze setup using Bollinger Bands is a great example of a breakout trade setup. It uses Bollinger Bands to find low volatility periods to avoid false breakouts.

Basic Trade Setups Tips

Types Of Trade Setups Are Not Mutually Exclusive

These four types of basic trade setups are not mutually exclusive.

For example, an upwards trend might pause and form a small range before continuing up. In that case, the breaking out of that range is both a breakout trade of the lower range and a continuation trade of the larger trend.

Basic Trade Setups - Trade-off Diagram

4 Types Of Basic Trade Setups (1)

As you can see, you cannot have your cake and eat it too.

Stop looking for the perfect trading setup with high win rate and high reward to risk ratio.

Start learning about the right market context to use your favorite trading setups.

If you need a more rigorous classification of trading strategies, you will need The Encyclopedia of Trading Strategies4 Types Of Basic Trade Setups (2).

4 Types Of Basic Trade Setups (2024)

FAQs

What are the basic trade setups? ›

Basic trade setups can be classified into 4 types: continuation, reversal, range-bound, and breakout. Each trade setup is used in different market contexts. Understanding the different types of trade setups is immensely useful. It is an easy way to improve your trading performance regardless of your strategy.

What are the four trading styles? ›

What is a trading style?
Trading styleTimeframeCommon holding period
Position tradingLong termMonths to years
Swing tradingShort to medium termDays to weeks
Day tradingShort termIntraday only
Scalp tradingVery short termSeconds to minutes

What is the basic structure of trading? ›

The most basic form of analysis is to identify higher highs, higher lows, lower highs, and lower lows. Within these four basic structures, you can identify further price patterns like head and shoulders, double tops, triangles, flags, and pennants.

What is the basic trading system? ›

1. Definition of a Trading System. A trading system is a set of rules that formulate buy and sell signals without any ambiguity or any subjective elements. These signals are mostly generated by technical indicators or combinations of technical indicators.

What are the four main trades? ›

To help you better understand which trade best fits your abilities, the skilled trades have been categorized into four main sectors: Construction, Motive Power, Industrial, and Service . Each sector includes a number of skilled trades with their own job descriptions and classifications.

What are the four main types of orders? ›

When placing a trade order, there are five common types of orders that can be placed with a specialist or market maker:
  • Market Order. A market order is a trade order to purchase or sell a stock at the current market price. ...
  • Limit Order. ...
  • Stop Order. ...
  • Stop-Limit Order. ...
  • Trailing Stop Order.

What is trade 4 trade? ›

T4Trade offers many tradable markets, including Forex, Metals, Futures, Commodities, Shares, and Indices. All these markets are offered with low spreads, making the trading costs quite reasonable. Traders can access all these markets through the MT4 trading platform, MT4 WebTrader and mobile apps.

What is level 4 trading? ›

Level 4: Naked Contracts

Naked contracts are the highest level of options trading because of the risks. Only the most experienced options traders should use naked call contracts. These contracts are like covered calls and cash-secured puts but without the protection of having the underlying assets. .

What are the 4 market structures trading? ›

Economic market structures can be grouped into four categories: perfect competition, monopolistic competition, oligopoly, and monopoly.

What are the basics of trade? ›

Trade is a fundamental economic concept involving the purchase and sale of goods and services, with compensation paid to a seller by a purchaser or the exchange of goods or services between parties. Trade can take place in a producer-consumer economy.

What are the four core trading principles? ›

Successful traders utilize a wide variety of approaches to attack the markets. Irrespective of the approach, virtually every top trader abides by four key principles: trade with the trend, cut losses short, let profits run, and manage risk.

What are the different types of trading? ›

Different Types of Trading
  • Intraday trading (Day trading): This involves buying and selling stocks within the same day. ...
  • Swing trading. ...
  • Scalping. ...
  • Positional trading. ...
  • Fundamental trading. ...
  • Technical trading. ...
  • Delivery trading. ...
  • Momentum trading.
Nov 20, 2023

What is the trading setup? ›

A trading setup refers to a well-defined and systematic approach that traders use to analyze the foreign exchange market and make informed decisions about their trades. It involves a combination of technical and/or fundamental analysis, along with specific rules and criteria that guide the trader's actions.

What is the basic trading plan? ›

A trading plan outlines how a trader will find and execute trades, including under what conditions they'll buy and sell securities, how large of a position they'll take, how they'll manage positions, and what securities can be traded.

What is the most basic trading strategy? ›

Moving averages are one of the most basic yet effective trading strategies. They calculate the average price of a security over a specified period of time and smooth out price fluctuations, making it easier to spot trends.

What are the 5 components of trade? ›

Here are the five key elements to include:
  • Element 1: Your time horizon.
  • Element 2: Your entry strategy.
  • Element 4: Your position size.
  • Element 5: Your trade performance.
  • Sticking to it.

What is the 3-5-7 rule in trading? ›

The 3–5–7 rule in trading is a risk management principle that suggests allocating a certain percentage of your trading capital to different trades based on their risk levels. Here's how it typically works: 3% Rule: This suggests risking no more than 3% of your trading capital on any single trade.

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