Track the Setup, Trade the Pattern

What’s the difference between a pattern and a setup?

I know it can be a little confusing, because some people use these terms interchangeably. I’m going to explain the way I use the terminology, which is the way I think most active day traders use it. When I first understood this, it was a breakthrough…

Make This Trade At 9:30 AM On Monday!

The Big Picture

Let’s use a stock from last week, Biodexa Pharmaceuticals Plc (NASDAQ: BDRX) as a case study. It was my Daily Market Profits Alert on Friday (Sept. 11).

Let’s break it down…

What We Track Is a Setup

First, BDRX was a big premarket gapper. Right off the bat, that put it on my radar.

Then it traded sideways and put in strong support around $0.85.

Now, between the gap up and premarket support, that gave us a good go/no-go area.

What do I mean by go/no-go? Take a look at the chart below:

Above support at $0.85, BDRX was still a setup (still in play).

Now, had BDRX broken down Friday morning, it would have been dead (and we would’ve scratched it off our list).

Also, BDRX is a micro-float former runner that was trading above average volume.

Was anything missing from the BDRX setup?

BDRX didn’t have any substantial news. So, it was mostly a momentum play.

Here’s a quick recap of the setup that made me continue to track BDRX:

• Gap up
• Big volume (9x float rotation in the first hour of premarket trading)
• Held support
• Former runner
• Low float (1.03M shares)

When I saw BDRX check all these boxes, I said “Okay, this is definitely a setup.”

But a setup isn’t enough because…

What We Trade Is a Pattern

In this case, the pattern is the break of previous high-of-day (HOD), which was roughly $1 per share in premarket.

Now, there was about 30 seconds where the stock printed as high as $1.16 per share. Don’t let that fool you. It was a few seconds at 4:02 a.m.

For the sake of this case study, let’s call it $1 per share. But instead of just waiting for the breakout, I used the Oracle signal which was $0.94 per share. When the Oracle signal closely aligns with the pattern, it gives me even more confidence.

It Only Becomes A Trade When It Follows the Pattern

The previous HOD break is a momentum pattern you should know. If not, you can read about it in my eBook, “10 Trading Patterns You Need to Know” which you get as a bonus when you sign up for Money Monday alerts.

Now, the great thing about patterns is they give us a clear trade plan:

• Entry: Break of previous high of day (in this case I chose the slightly lower Oracle signal to increase reward-to-risk)
• Risk: support at $0.85
• Target: $1.20

The reason the target was $1.20 is that we always start with 3:1 reward-to-risk. So, with around 10 cents of downside for 35 cents of upside, it was better than 3:1.

My Take

If all you did was take the setup criteria, wait for the pattern to appear, and trade 3:1 reward-to-risk, you would have been in and out in a very short period of time.

No big deal, no stress.

Now, let’s say BDRX didn’t make the move. You could have tracked that setup all day, but again, you only trade it when it transitions from a setup into a pattern.

Watchlist

Future FinTech Group Inc. (NASDAQ: FTFT) did a reverse stock split in August. The big move over the past few days is more low-float momentum squeezing short sellers.

FTFT was highly volatile yesterday and it might be done for now. That said, if it wasn’t already on your rolling watchlist, add it because it has a history of multi-day runs.

On My Radar

• 49 days until midterm elections. It affects markets, so…
• With all the AI fear-mongering, this is a must-read: “The Technological Republic” by Alex Karp and Nicolas Zamiska
• If you missed Tim Sykes live yesterday, he’s doing it again at 1PM ET today