Day trading is fast, fast, FAST. If you don’t know what you’re doing, you can kiss your capital goodbye.
Before you enter any trades, you must know when to enter the market, when to buy, and when to sell. But that’s not all …
When buying and selling stocks and assets in a short period of time, you also want to make sure you know how to identify trends, patterns, and entry points. This can help you minimize losses and increase your chances of reaching your trading goals.
That’s where day trading setups come in.
What are setups? How can you use them in your own trading? Let’s take a look at the wonderful world of setups now.
Table of Contents
- 1 What Is a Day Trading Setup?
- 2 Benefits of Using a Day Trading Setup
- 3 4 Favorite Day Trading Setups
- 4 Key Points to Keep in Mind With Day Trading Setups
- 5 The Bottom Line
What Is a Day Trading Setup?
Download the key points of this post as PDF
You probably already know that day trading is the practice of purchasing securities during a short window of time, normally in rapid purchases throughout a single day.
Traders respond to small price movements in stocks and indexes, aiming to buy at a low price and sell at a higher one.
The goal of day trading is to secure quick profits. Purchased stocks are owned by a day trader for usually no longer than a few minutes (sometimes seconds) before they are resold.
A day trading setup, also known as an entry strategy, helps you identify trading opportunities, trends, and entry points.
Smart day trading setups require efficient technology, which you can update over time. While it’s possible to day trade using just a smartphone, a more sophisticated setup involves a reliable computer — either a desktop or laptop (like these sweet systems).
A high-resolution monitor can also be very useful when maintaining a high-level view of stock movements. (Check out our guide to trading monitors!)
Benefits of Using a Day Trading Setup
In this world, some things you need to know include patterns, price action, and recognizing the difference between long and short trades.
When you know these things, you make better-informed decisions and take strategic action. So, with the right setup, you can reduce your trading anxiety and boost productivity.
What’s not to like, right? Here are a few setups that rank high among many day traders’ favorites. You might learn that you prefer other setups, but this is a good starting point to introduce you to the idea …
4 Favorite Day Trading Setups
Because there are a variety of trade setups, it’s important to choose the strategy that best suits your trading style. The better you understand and connect with a particular setup, the more likely you are to see results and improve your day trading process.
The following four setups can help you manage risk and allocate resources. Mastering just one of these setup techniques can help you trade with more confidence — and hopefully better results.
1. Day Trading Breakout Setup
The breakout trading strategy is popular among many traders, from professional to beginner.
The breakout is ideal for monitoring potential losses because you can often see immediately when you’re making a wrong decision. And in trading, you always want to cut losses quickly!
Another appealing aspect of breakout trading is that the techniques and principles involved can be applied to all securities on the market, from stocks and Forex currencies to bonds, commodities, and cryptocurrency.
In breakout trading, you first need to identify a price level, which represents your breakout trading level.
Day traders move into the market once they see that a stock price breaks beyond that defined range. After this break, you close the stock above resistance level. This is known as “support and resistance.”
KALY chart: Breakout Source: FreeStockCharts.com
When it comes to buying and selling, aim to buy when the market breaks above a failed resistance level, and sell when the market breaks below a failed support level.
Another form of breakout trading is known as “swing high and swing low” breakouts.
It works in a similar way to support and resistance. However, in this case, the breakout trades happen only with the setups that indicate the best potential returns. On a chart, you look for a “V” shape, which indicates a strong rally and is followed by a strong selloff.
The downside: When you scan the market for possible breakouts, you’ll likely encounter false ones at some point. Also, breakout trading requires skills like the ability to assess whether a support and resistance breakout will hold or fall. If you’re not comfortable doing this, don’t make the trade!
To avoid these false breakouts as much as possible, you can use a technical indicator, such as a volume-weighted moving average (VWMA). This indicator is useful because it analyzes volume, not just price.
You also have a few options when it comes to acting upon a breakout. You can either wait to buy it, or anticipate the breakout by building a strong position. Each option carries different risks and potential outcomes. Always do your research — and lots of it — before you trade.
Considering the allure of potentially instant returns coupled with the excitement of surfing stocks’ momentum, you can see why breakout trading is such a popular technique.
Now let’s take a look at ranges …
2. Trading Ranges Setup
A range-bound trading strategy focuses on sideways price action, and stocks that swing back and forth between two prices after they’ve stopped following a certain trend. These are referred to as a “range-bound” stocks.
Fun fact: Range trading is especially popular among forex traders.
The range trading strategy takes advantage of the percentage of the market that is non-trending. For example, if the market only trends 30% of the time, then this leaves 70% of the market to experiment with.
Trading ranges also consider support and resistance. Why? Because support and resistance levels are created when price oscillates.
First, you’ll need to confirm that price range to make sure the price doesn’t break above or below any point in between the highs and lows. At least two similar highs and lows need to have occurred in this price oscillation for it to be considered a range-bound setup.
One of the trickiest parts of range-bound trading is finding those two points against which to trade — that essentially represent support and resistance levels. Your example chart here shows range trading over several days.
CWCO chart: Range Trading Source: FreeStockCharts.com
Unlike many setups, trading ranges don’t offer the opportunity to ride a stock trend — but the highs and lows involved can be relatively predictable.
So once you get the hang of them, trading range-bound securities could be a great strategy for you.
There are many complex strategic approaches to range-bound trading, but the simplest method is to buy near the support level and sell at resistance. You don’t want to find yourself on the wrong side of the breakout, so be sure keep an eye out in case this occurs!
It’s important to note here that tracking trading volume is just as important as watching support and resistance patterns. At the end of the day, range trading involves making a purchase based on the presumption that a price will fluctuate between certain highs and lows.
Many traders use indicators such as relative strength and commodity channel indexes to help them place their trades. These can help better identify the entry or exit positions of support and resistance.
Now let’s talk flags …
3. Trading the Flag Setup
Flag patterns are relatively easy to recognize on charts and follow straightforward strategies.
As the name suggests, being able to identify flag shapes on a price chart is part of the setup. The way that the flag is “blowing” indicates the direction of the primary trend, and represents a stock going through a strong uptrend.
The flag shape formation is a result of a stock that made a strong move upward, on high volume (forming the pole shape), and then consolidating at the top of the pole, on lighter volume, where the flag is formed.
CANB Chart: Flag Pattern Source: FreeStockCharts.com
This trend continues when the stock breaks out of the consolidation pattern — once again on high volume.
To identify a strongly trending flag, look for patterns with less than 23.6% retracements.
Flag patterns always stay above the 23.6% threshold. You place your purchase on the break of the high.
It’s also important to watch for impulsive moves which have little to no retracements.
Flag trading can follow a momentum trading strategy, and these stocks are normally traded on two- and five-minute time frames. It isn’t just a day trading setup either; it can also be applied to swing trading.
If you’re looking for simple trade setups, flag trading could be right for you. However, identifying the flags can sometimes be tricky. Fortunately, with the help of a scanner, you can often quickly find the stocks that are surging and then consolidating to form the flag shape on the charts. Once the price has broken out above the consolidation pattern, on high volume, that’s your time to strike.
Clearly, volume is a key element to look out for when flag trading, as it confirms the pattern when it happens at the right moment. You want to jump on board when the volume comes in on the breakout!
There are several types of flag patterns, like bull flags and bear flags. The main differences are that the flags trend in different directions, upside, and downside.
Flag trading is widely considered to be great for new traders because once you understand them, they can be easy to spot and trade on.
Flags are generally small chart patterns, which means they tend to carry less risk than other day trading setups and can yield potentially pleasing results.
Now, last but not least, it’s triangle time …
4. Triangles Setup
Triangle trading occurs with highly volatile stocks that pause, giving you the chance to figure out exactly how you’ll trade it before it starts to move again.
Once you find a volatile stock that’s worth trading, consider trying the triangle day trading technique.
The main objective of the triangle day trading setup is to catch the profit as the price is moving away from the triangle.
For a triangle to occur, you need a minimum of two swing highs, and two swing lows, which are both connected to trendlines which extend to the right. Your example chart here shows a bull flag with triangles over a few days. It’s not perfect, but you can see the triangles to a certain extent — this is more realistic anyway.
FRLF chart: Bull flag with triangles Source: FreeStockCharts.com
There are three different types of triangles (symmetric, ascending, and descending), but they’re all traded according to the same breakout strategy.
Always make sure that strong movement and volatility precede the formation of the triangle, then draw the trendline once you see the triangle pattern forming.
With the triangle setup, you buy below the most recent swing low and sell above the most recent swing high.
Many pros recommend searching for triangles during lunch hour in the U.S. because it’s a time when volatility typically declines, allowing triangles to form before volatility picks back up again.
Another fun fact: Potential profit is always calculated based on the triangle height.
If you’re interested in triangle trading, try it with a paper trading account first. It’s never a bad idea to hone your skills by placing stop losses and quickly calculating targets before you start trading on real capital.
When using a triangle setup, remember that your target — as with all trading in general — isn’t an exact science. A good rule of thumb: Aim for a reward outcome at least twice as much as the risk involved in making a purchase.
Key Points to Keep in Mind With Day Trading Setups
1. Follow Chart Patterns
Before you set out to find great trading setups, it’s crucial that you become familiar with reading charts and identifying chart patterns.
While we, as traders, can never predict price action with absolute certainty, once you start gauging historical price action from chart activity, you’re taking steps to avoid risk, and can potentially increase your reward probability by placing the right trades.
So whatever day trading setup you decide to follow, make sure you’re confident in following chart patterns, whether it’s a triangle, flag, or otherwise.
2. Identify Trends
Trade with the trend — it’s an age-old adage, well-known by all traders.
Identifying trends (like support and resistance) in chart patterns is necessary for all day trading setups. To avoid risk and unnecessary losses, keep it simple and trade with the trend!
Determining trends and identifying when they end are all skills you’ll — hopefully — learn as you gain trading experience. Learn them.
3. Stick to Your Trading Plan and Indicators
Your trading plan defines which stocks, assets or securities you plan to buy and sell, which day trading setup you’ll follow, and which resources you’ll use to keep you on track.
Without a solid trading plan, you shouldn’t even bother trading. It’s that important. Learn to create a trading plan now.
If you switch between setups and change your plans mid-trade, you’re in for trouble. Stick to your plan. And if a trade starts working against you, get out immediately.
Also, be sure to take advantage of your indicators. They’re there for a reason and can help you to identify crucial trend lines and directions. Use them!
4. Use a Great Stock Screener
No matter what type of trading account you have, it’s important that you find the best trading opportunities each day — to do that, you need the right software.
Check out the StocksToTrade platform to see why many of the best traders in the world begin each day by loading up our platform.
StocksToTrade is a one-stop-shop for your order entry, charting, watchlists and newsfeed needs. If you’re ready to start trading at a higher level, get a 7-day trial of StocksToTrade for $7 now!
The Bottom Line
Trading setups are awesome. They can improve your ability to read charts, identify patterns, and understand trends and entry points in the market.
Try out different setups and see what works best for you. Once you get into the swing of a setup that works for you, see how far you can go to perfect your technique …
… You might be surprised by how far it takes you!
What are your favorite trading setups — and why? Leave a comment below and tell us about it.