Setups! Finding, Defining & Testing Them

[SOCRATES]

Here's a chart that'll maybe help discussion of definitions.

1. breakout - price breaking through tested s/r levels. In this case the October break through the red resistance line, which enables the earlier action from April to be regarded as the start of an uptrend and a trend line drawn in.

2. trend - a series of higher major lows (termed swing lows for me) and higher major highs. Can be thought of as rising support lines (blue lines)

3. retracement - a temporary correction to the trend. In the example chart the pullback from each major high might be a retracement or the start of a reversal. In hinsight there are clear retracements on the chart as the corrections stop and the trend continues to make new highs. In the white circle though we don't know yet whether the correction from the high was a retracement or the start of a reversal (or the start of a flat range). It's looking like a retracement but this will only be confirmed if it rises to new highs (by which time it'll be too late to trade it :cheesy: ) and the last three bar rise could be a retracement of the first leg of a possible new downtrend.

4. reversal - a change in trend signalled by a break through the last major low (high) and/or through the trendline. Still only potential at this stage and requires confirmation by a subsequent failure to make new highs (lows)

Others may see things differently.

jon

Dear Barjon, bless you, I know you mean well, you really do, but you are striclty speaking not correct , and I am going to clarify this for you and for the membership, and I sincerely hope you can accept it in the spirit in which it is intended, and indeed, offered.

1. Breakouts:~
First of all this is not a breakout. It is in fact that by now the trend has been established and participation has commenced and continues in a bullish mode. This is because in the final low preceding the rise, final buying has taken place, thus providing the energy for prices to rise. This energy is sufficient to push the price up until it reaches the level of the previous tops, and because at this juncture demand is still greater than supply it lifts above it and continues. A breakout is a very different market situation, because it is sudden, quick, and is accompanied by volume.

2. Trend:~
I think for newbies the definition that I gave in a previous post is sufficiently clear to prevent people from becoming confused, particularly on a thread like this for the benefit of newbies, it has to be a main consideratton.

3. Retracements:~
If you refer to my previous post on what consitutes a trend the idea of what really is a retracement is contained within it, meaning that retracements have specific characteristics. In a bull phase the fallbacks have to be smaller than the rises. In a bear phase the rises have to be smaller than the falls.Therefore for whatever reason, if these criteria do not remain intact, therefore the phase has changed either in intensity or speed of advance and may mean the opposite has now replaced the previous, but not necessarilyand subject to verification.

Reversals:~
The levels of bottoms and tops relative to each other have to change positioning in order for this clearly be shown to be the case. It is the order of appearance of these tops and bottoms sequentially which defines whether the trend has changed or not.


Kind Regards As Usual.

 

[barjon]

Socrates,

No problem - as always I stand to be corrected.

In the interests of the thread I was trying to stimulate some discussion in helping to find a common currency of definition (which is not as easy as it first sounds) since it seemed a bit counter-productive just to point people to a reference library.

jon

 

[SOCRATES]

I agree. If the explanation that sorts the problem can be given easily and quickly to prevent confusion later on,it should be given immediately, without delay.

If the explanation deals with a particularly difficult aspect of trading that is only suitable for the advanced and very advanced and requires a lot of explaining and demonstrating, then it is a different matter altogether.

Provided I can spare the time, I am happy to help as and when necessary.

 

[barjon]

Db

ok, I think we'll have to agree to differ. I thought tmsk was looking for a common currency of definition merely for the purposes of discussing things on this thread. Having tasted the smogasbord he, or someone, can say "right, these are the definitions we will use for our discussions".

jon

 

[SOCRATES]

No more counter-productive than providing a smogasbord of definitions, after which the newbie still doesn't know what to do.

If one wants to know what is required of a definition, test the setup. The process will tell him what is required.

--Db

I do not agree with you either.

The newbie does not know what to do, because no one is born knowing ~ everybody has to learn first before they can know anything.

Your second comment is equally unwise.

A newbie cannot be left to test any setups, he has to understand the principles thoroughly before he can do any testing of any sort.

In connection with the two sets of ideas you express above, my strong suggestion is that all of this be explained as clearly and as simply and as concisely as possible in order to eliminate any doubt whatsoever precisely what is being discussed and for what reason.

 

[SOCRATES]

Yes, I will.

 

[timsk]

Db
ok, I think we'll have to agree to differ. I thought tmsk was looking for a common currency of definition merely for the purposes of discussing things on this thread. Having tasted the smogasbord he, or someone, can say "right, these are the definitions we will use for our discussions".
jon

barjon,
I love you forever. I was beginning to think that I'd failed completely to communicate what I thought was a fairly simple and straightforward concept. You have understood my intent perfectly. Thank you.

Just because I started the thread doesn't mean that it's about me. On the contrary, it has nothing to do with me and my trading. As far as anyone here is concerned, I (or anyone else here for that matter) may well have gone through the process of finding, defining and testing setup(s). All of us may have a very clear understanding of 'trend', 'retracement' and other commonly used terms - but that isn't - I repeat isn't - of any value or use to this thread. Hands up if you're interested in my personal definition of 'trend'? No takers? There's a surprise; not! My definition of 'trend' and the amount of work that I've put in to come up with it is meaningless and utterly valueless to everyone except me.

If those that are contributing or lurking on this thread are interested in the process by which other traders go about the business of finding, defining and testing setups - then the thread still has legs. I do, obviously, which is why I started it. If the consensus of opinion is to get bogged down with definitions of 'trend' - or whatever - or, alternatively, want to examine an existing setup such as the one Grey1 outlined earlier - then that's fine by me. But it isn't why I started the thread or what I hoped it would achieve.

Tim.

 

[SOCRATES]

Timsk, the setup illustrated and described by Grey 1 is "conditionally perfect".

What does conditionally perfect mean?

It means that in order for it to be so, it needs to be seriously underpinned by understanding and familiarity with what is going on when and where it appears.

The general conditions that exist in a given market when that configuration of candles appears is what determines the outcome.

This general understanding is not a mechanical process. It is an intellectual process.

This intellectual process is only effective if the applicant of the process has understanding.

Understanding does not come from a mechanical perspective on the development of price action.

Its source lies in a different place of the trading mind. It is the consequence of knowledge and the ability to recognise when it is that conditions warrant it being taken as valid.

This is because trading, despite all attempts to mechanise it, is an art form.

Within this art form there are strong elements of logic embedded. The logic has to be mastered first as to how and where it fits in the scheme of things and then, and only then with a lot of work, effort and time expended can it be elevated to an art form.

It is a as simple as that, no more, no less.

 

[OpenMind]

I agree with Socrates here. There are parts in my trading strategy which involve pure gut feel, things which I cannot fully express in words. OK, I am lightyears away from Socrates or DBPhoenix but you know what I mean.

I agree that trading is an art. If it was fully programmable, then all we would ever need for success would be a PC, software and a trading strategy bought off the shelf to be loaded into the software. We could just set it on auto-pilot and forget about it.

That trading is an art is also manifested by the fact there are millions of ways to make money out of trading (just as there are millions of ways to start with an assortment of paints and create a decent picture), unlike Physics for example where everything is rule and law bound. In arts, you only have axioms (e.g., two different colours create a third one, or, price goes up when demand exceeds supply). In science, you have theorems (which are proven conclusively starting with an axiomatic foundation). You never have theorems in arts.

Sorry this is far too theoretical.

 

[OpenMind]

Just a quick clarification: I actually don't trade by feeling alone. I have a set of written rules, which act as my trigger. The final decision on whether to take the trade or not depends on my feeling about the chart of the stock at that time.

But I know what you meant and I appreciate it.

 

[SOCRATES]

No matter how it is that intuitive input is presented to you DB Phoenix, you persist in reducing it to rock bottom mechanical and then go on to talk about feelings. Feelings have got nothing to do with all of this. Feelings and Intuition are very different things.I find all this exasperating, and I give up. Boring ! Tedious !

 

[SOCRATES]

Yes DB, better but not perfect. I will expand on it:~

Intuition is the consequence and the extension of total expertise, which is the consequence in turn of total familiarity and mastery over a particular scenario, part of an extensive portfolio of different scenarios. This finally arrives after many years of experience in which it is as if the market "talks", and proceeds to reveal its intent about imminent price development to those who can understand what is being inferred. It is extremely difficult to explain because it is wholly abstract. It is a very special kind of "knowing", a sort of "compelling knowing".

A setup is a condition which is repeated sufficiently and in varying versions sufficiently for it to be identified in general terms, and therefore potentially to be used. This setup can be used as its repeated appearance has provided opportunities for it to be verified not to be a random event or an element of chance. Satisfied that this is not the case, if and when the identifiable condition reappears in recognisable form, the skilled trader takes advantage of it and uses it by the application of logical deduction and reasoning and the proper response.

A setup is possible to explain because it contains strong elements of tangibility which can be explained.

Intuitive input is very difficult to explain indeed because it contains exclusivelly intangible elements.

Thus a setup or an alarm for a setup are very different indeed to what is a compelling intuitive inference.

I am now satisfied.

 

[SOCRATES]

Now why have you pulled your post number 71, I ask you DB ? Is it so that what I reply to you now looks out of context or what ? What are you playing at now, eh ?

 

[barjon]

barjon,
I love you forever. I was beginning to think that I'd failed completely to communicate what I thought was a fairly simple and straightforward concept. You have understood my intent perfectly. Thank you.

Just because I started the thread doesn't mean that it's about me. On the contrary, it has nothing to do with me and my trading. As far as anyone here is concerned, I (or anyone else here for that matter) may well have gone through the process of finding, defining and testing setup(s). All of us may have a very clear understanding of 'trend', 'retracement' and other commonly used terms - but that isn't - I repeat isn't - of any value or use to this thread. Hands up if you're interested in my personal definition of 'trend'? No takers? There's a surprise; not! My definition of 'trend' and the amount of work that I've put in to come up with it is meaningless and utterly valueless to everyone except me.

If those that are contributing or lurking on this thread are interested in the process by which other traders go about the business of finding, defining and testing setups - then the thread still has legs. I do, obviously, which is why I started it. If the consensus of opinion is to get bogged down with definitions of 'trend' - or whatever - or, alternatively, want to examine an existing setup such as the one Grey1 outlined earlier - then that's fine by me. But it isn't why I started the thread or what I hoped it would achieve.

Tim.

Tim

Glad I caught your drift but not sure I catch the relevance in terms of "the process by which other traders go about the business of finding, defining and testing setups "-

Early in the piece Db pointed to two posts on other threads which seem to cover it and - as he and others have pointed out - pursuing that process is an individual mission.

http://www.trade2win.com/boards/showthread.php?p=134091
http://www.trade2win.com/boards/showthread.php?p=134166

Or did you have something else in mind?

cheers

jon

 

[SOCRATES]

Ah ! Of course it is obvious, isn't it DB ?

1. You do not like to be what you interpret as being "contradicted"

2. You do not like the shallowness of your knowledge to be shown up.

3, You do not like to be challenged in any way that relates to Price Time Volume and Intent.

4, You view yourself as the Oracle on this niche topic you consider perhaps to be your exclusive property.

5. You are reluctant or unable to accept there is more to it than what you propound.

How stupid of me not to realise this......Gosh !

 

[SOCRATES]

I agree with Socrates here. There are parts in my trading strategy which involve pure gut feel, things which I cannot fully express in words. OK, I am lightyears away from Socrates or DBPhoenix but you know what I mean.

I agree that trading is an art. If it was fully programmable, then all we would ever need for success would be a PC, software and a trading strategy bought off the shelf to be loaded into the software. We could just set it on auto-pilot and forget about it.

That trading is an art is also manifested by the fact there are millions of ways to make money out of trading (just as there are millions of ways to start with an assortment of paints and create a decent picture), unlike Physics for example where everything is rule and law bound. In arts, you only have axioms (e.g., two different colours create a third one, or, price goes up when demand exceeds supply). In science, you have theorems (which are proven conclusively starting with an axiomatic foundation). You never have theorems in arts.

Sorry this is far too theoretical.

Your post is not theoretical at all, in fact it is very interesting.
What is more, I happen to agree with all of it.

This gut feel you talk about is raw intuitive input.

When you are able to come to tems with it and trust it you will find it to be unerringly right.

Making this quantum leap into following the unknown is a daunting idea.

But you will get used to it and like it. I am pleased to see at least one member so empowered.

KInd Regards.

 

[timsk]

Tim

Glad I caught your drift but not sure I catch the relevance in terms of "the process by which other traders go about the business of finding, defining and testing setups "-
Early in the piece Db pointed to two posts on other threads which seem to cover it and - as he and others have pointed out - pursuing that process is an individual mission.
http://www.trade2win.com/boards/showthread.php?p=134091
http://www.trade2win.com/boards/showthread.php?p=134166
Or did you have something else in mind?
cheers
jon

Hi Jon,
The links to Db's posts in other threads are very useful and informative. It is one process which is based on logic, although I've never seen a worked example from start to finish. I'm sure there are loads - I've just never seen one. Some people will endorse SOCRATES' view that a mechanical/scientific approach isn't enough by itself. Others will think it is all you need. It doesn't matter. Other traders will approach the problem differently. Jake Bernstein - 'famous trader' - has a set-up based around days of the week or some such. I know one trader (who is consistently profitable Sbing the FTSE100) who studies I Ching and gave a most enlightening talk on how this could be used in trading. The possibilities are endless. I was hoping to get input on the creative side of finding setups - which was meant to be the starting point of the thread. All artists get inspiration and ideas from other artists. I had hoped that the T2W community would share their ideas on how they find, define and test their set-ups. Sadly, it would appear that I'm very much mistaken.
Tim.

 

[SOCRATES]

Timsk, I do not say that a mechanical/scientific approach is not enough. It can be enough for the right person, provided the individual concerned has mastered mechanical concepts totally and is aware of their limitations. This is because in the end analysis trading cannot be effectively mechanised.

What I go on to explain is an extension of this idea.

I go on to reveal that there are higher levels of proficiency above what is mechanical.

These levels of proficiency include for want of a better word, "intuitive input". This faculty is a kind of super "knowing" that is very dificult to explain because in contradistinction to the mechanical approach, it is purely abstract.

It allows one to know where the price is ultimately going to go, even without the use of a chart, to give you some idea.

But as I said earlier in the thread, beginners have to start somewhere.

In this regard, I am still of the view that discussions with regard to setups may be beneficial, but only up to a certain level, and beyond that level, setups become inconsequential.

So constructive discussion of various setups for the benefit of beginners would be beneficial to them, and I hope you will continue to pursue the subject, and as I said to you earlier, I am willing to help you, as and when I have time to devote to your discussions.

 

[Tuffty]

The issues coming out in this thread I think are:

1) Setups are only part of a trade which is only one aspect of a methodology of trading.

2) Without putting them into context (ie a methodology) one doesn't have a common denominator to talk about them. Some will only see them in the context of their own way of trading which will only be relevent to that methodolgy. Without defining this then setups don't have any meaning on their own.

One cannot define, test or find them without a bigger picture. For example if you're a discretionary trader based on price and volume, then I presume the only valid set up criteria is various combinations of these two variables plus the expert intuitive imput that Soc talks about. If we focus on setups within this methodology then we ignore all other methodogies of trading.

 

[SOCRATES]

Precisely Tufty, that is absolutely correct.

But, having said that, at a mechanical level it is useful for newbies to begin to be able to recognise what is and what is not, and in this regard, discussions about setups, at the level of profiiency of which we are talking about may be of use, so I am willing to help if and when I have time.