As an aspiring day trader, you hear a lot about trading patterns, setups, and strategies…
But what are they exactly?
Are they different words for the same thing? Or do they refer to something specific you should be looking for?
I recently got asked a similar question during my Facebook LIVE session…
So today I’m going to answer it for you. Because patterns, setups, and strategies are all different things.
And it’s crucial to know the difference so you can make better trading decisions.
So let’s dive in and learn what they mean.
What Is a Strategy?
A strategy is like a roadmap for trading…
It’s a rule-based methodology and a process with a lot of criteria that allow you to only execute a trade when those criteria are met.
Swing trading is an example of a strategy.
My swing trade strategy includes about 10 to 15 distinct criteria that I look for.
And if those criteria are not met, then the stock doesn’t fit the strategy and I ignore it.
Having a strategy means being rules-based and looking for very specific things in the market.
What Is a Pattern?
Now, let’s talk about patterns.
Patterns are strictly based on a stock’s chart, the price action, and the volume.
The dip and rip, morning panic dip buy, or afternoon VWAP hold are all examples of patterns.
So is a stock breaking above $1 … And a low-float biotech with BS news is also a pattern.
You could call it a strategy but I call it a pattern because we know what will eventually happen to a low-float biotech with news…
They tend to spike, then fail and fade away on offering news. And the company will repeat this process every few months.
Patterns are basically anything on the chart that repeats.
We know that when a stock hits certain levels they tend to spike. And when they go below certain levels they tend to break down.
Those are repeating chart patterns.
Learn more about charts and patterns in this video series.
What Is a Setup?
When I talk about a setup, I mean a stock that matches one of our trading systems.
A setup helps us categorize stocks based on the specific trading system they align with. Basically, it tells us which basket the stock belongs to.
It could be a short setup, long setup, swing setup, dip and rip setup, earnings winner setup, or any other relevant category.
Having a strategy helps us trade with specific criteria. Patterns show us predictable chart-based movements. And setups help us identify which trading system a stock fits into.
Always remember to follow your strategy, recognize patterns, and match stocks with the right setups.
As you gain more knowledge and experience, you’ll be able to align your trade ideas with the right strategy, pattern, and setup. And you’ll be able to make smarter trading decisions.
If you want help in the meantime — watch my Market Update videos three times per week to stay on top of what’s happening in the market and what I’m watching.
I’ll even send you exclusive weekly watchlists, monthly reports, and more!
Check out all the details here.
Have a great day everyone. See you back here tomorrow.
Tim Bohen
Lead Trainer, StocksToTrade