Building a Plan Using the 3 Main Types of Setups

This is more basic educational content, but I feel this is very important to be clarified for our less experienced members. It's extremely important to understand this when planning a trade. When you pull the trigger and enter a trade you need to have a plan. This will help beginners to build a plan.

To me there are 3 main types of setups (if we exclude all delta-neutral and non-directional strategies)

• ●Reversals: we have an established trend in a direction, we're betting on the trend to reverse. Reversal MA compressions, ideally combined with higher TF MA/horizontal support are our signal. Divergences + HTF support resistance are another strategy, they work great with swifter reversals after a big move in a direction (aka rejections), but compression are more reliable for full reversals, and since V-reversal are rare, divergences tend to only give deadcat bounces during a bear market.
• ●Continuation: we have a established trend in a direction, we're betting on the trend to continue. This usually gives two setups: immediate continuation off the EMA13/21 trend or re-accumulation compression. Though depending on the timeframe, these may end up overlapping, a 15m compression will usually coincide with a 4h trend continuation (since 15m ema200 is pretty much 4h EMA13), and 1h compressions will be aligned with daily trend continuation (since 1h ema200 is between daily EMA13 and daily EMA21).
• ●Range: there is no clear trend but we can see price moving horizontally. I don't really trade range (ok now I do a lot in forex lol), but the interesting part is in the next paragraph, identifying range can be very usuful to optimize execution and entries on the reversal and continuation setups. Also setups taken at the extremities of a range (long at range lows, short at range highs) are actually lower timeframe reversals. So overall it's really about continuation vs reversal.
• ●We could call mean reversion plays as a kind of setup too. But to me, if we're talking about a horizontal mean reversion then this is akin to range trading. If we're talking about a "moving mean reversion", then it is also covered by our continuation plays where EMA13/21 is the moving mean reversion (just like if you trade mean reversion using bands indicator, EMA13/21 zone would be the midline of your bands indicator)

Note: If you're confused about the reversal and continuation MA compressions, make sure you go through the rest of my educational content first!

Now that we have defined these 3 types of setup, we'll also remember that price action is fractal. What does it actually mean? Well I'm sure most of you have watched these Mandlebrot fractals videos with near infinite zooming https://www.youtube.com/watch?v=fnuSrhGWqu4 I love these, there are entire universes in these!). As you zoom in and out, you see the same patterns repeat infinitely. It's the same for price action. What I'm saying is that if you zoom enough on a range, you will find trends within the range, and if you zoom out enough you will likely find trends between ranges where the range is simply another consolidation before a continuation of the trend.

Now how do you use this information? - planning trades and bias. You NEED to be aware of what you're trading, whether it's a continuation or a reversal. I'd say it's the most basic thing, but experienced traders don't even think about it after a while it's become natural/subconscious. But if you're a beginner, maybe even add a column in your journal to identify the type of setup. In fact you should probably document all your favorite strategies/setups, asisgn them a number or a name, and add that identified to your journal entry.

Now an example: Let's say you've identified a clean range on a given timeframe and it has lasted for a long time, are we going to breakout of the range?, so be careful about what you think may be the next deviation from the range, it could simply be a breakout. Similarly, if we've been trending for a long time, you must consider 3 scenarios: parabolic blow-off, consolidation (range for a while before continuation), reversal. Normally you should have a list of your favorite setups/strategies with specific filters and conditions (will share my own list in the next article). It should be obvious, but don't apply range strategies when it's trending, and don't apply trend strategies when price is ranging! For example, don't start aping 1h EMA13 retests while we're still within a 1h compression, most likely 1h MA100 will reject hard and 1h trend will be ignored!

• ●identifying range and trends properly can help you focus on your strengths: - if you're better trading ranges, and market has been chopping for a while, be careful about the next deviation you're hoping to get back into the range! If the market is trending, zoom-out to find the outer range we're nested in, that's likely where the current trend ends. - if you're better trading trends, sit out during periods of chops. MA compressions are a good tool to help identify when ranging is likely to complete. - identifying range and trends properly can help you improve your execution and entries - we just had a big directional move, you are expecting continuation. While you may be correct, there will likely be a consolidation (=range) first. If you wanna long, wait. If you miss you miss and don't lose money. If it starts consolidating, looking at the consolidation may either show a distributive pattern and you reconsider the long. If the consolidation looks good, you can buy consolidation support or small deviation below support for a much better entry and invalidation, resulting not only in a higher R:R but also a better execution typical of comfortable entries.
• ●a bit more advanced, but if you are looking for reversal or continuation and we're currently in a range, you can use this to your advantage to build a less risky position. You do that by both planning for your reversal or continuation and range trading at the same time. Let's say this is a long and you're looking for a reversal, you are very confident the reversal will take place, but less confident about the exact timing, and you're anticipating price to range a bit longer. Bids on range support and slightly below (remember to embrace wicks), you can sell 20-35% at the range high. Rince and repeat. If we chop long enough you may earn half an R or more, and since you are confident about the reversal, that allows you to build a larger sized position without increasing risk.