Each trader trades based on his own principles and conditions. In the sense that he considers the parameters that are often profitable based on his experience and are easier for him to work with. It is obvious that a trader may consider a trading framework at the beginning of his work and gradually modify and improve it. In this post, I am going to discuss the difference between a trading strategy and a trading setup and explain their nature with an example.
What does trading strategy mean?
Trading strategy refers to all the rules, principles and approaches that help you make decisions to operate in the financial markets. In other words, the road map that defines a trade or investment process for you from the beginning to the end; It is your trading strategy. By having a correct and logical trading strategy, you can always consider order, risk management and evaluation of your activity.
But what should be done to formulate the best trading strategy that is also profitable? To answer this question, several important points should be considered.
The first point is to be fully aware of your risk tolerance. Due to this feature, you should specify a risk-to-reward ratio in transactions. For example, a person is more risk-averse and has a risk-to-reward ratio of 1 to 3. Another person is less risk-averse and sets the ratio at 1 to 1.5.
The second point is to pay attention to the time frame. A trader chooses short time frames of a few minutes to a few hours according to his personality and trading spirit. Another day trades and another person trades long-term.
The third point is to choose a trading tool, pattern or style. A trader gets signals by using indicators and their integration. The other pays special attention to traditional styles such as head and shoulder patterns, etc.
But the last thing that is most important is to get a backtest of the trading strategy. You have developed a strategy for yourself according to the above points. This strategy should be evaluated in the past of the market and in different symbols. If it can have a profit percentage above 60%, it will be acceptable. Fortunately, with various tools, it is easy to backtest a strategy. That's why I recommend that you test a strategy on demo accounts before using it.
What is a trading setup?
Trading setups are parameters that traders wait for to enter a trading position. In simpler terms, a series of events must happen to issue the final signal to buy or sell digital currency or trading symbol in general. With this definition, the number and types of trading setups are equal to the number of traders! Because each trader determines the trading setup according to his mood and personality.
I will explain more about the concept of trading setup by mentioning some examples. Suppose a trader bases his strategy on support and resistance lines. He defines his trading setup as follows: “If the price chart crosses the support and resistance lines with some strength, there is a possibility of a return below the support line or above the resistance line. So, I determine the trading setup based on the strength of breaking the support and resistance lines.
Another example of a trading setup is "if the price chart only touches the support or resistance area and does not break them, the probability of a price reversal is very high". This setup is called Test Setup. Another trader uses a pullback setup, which means "I enter the position with the second pullback after breaking the support zone with resistance".
These setups are just an example of thousands of trading setups available. Each trader should formulate his own trading setup according to the level of experience, risk tolerance and even the type of assets. There are all kinds of setups in the price action method that every trader can use. Keep in mind that you can also use other people's trading setups. But experience has shown that every trader has his own views and capital volume, and prescribing one person's trading mechanism for another is not very reasonable.
But there is a very important point when setting up a trading setup. You may have formulated a trading setup based on your knowledge and experience, but after some time you realize that this setup is ineffective and unprofitable. In this situation, it is enough to optimize it. Optimizing a trading setup means fixing bugs and improving a setup. This issue is usually determined in the backtest of trading setups in formal and test accounts.
What is the difference between trading setup and strategy?
But what is the difference between trading strategy and trading setup? In fact, trading strategy includes trading setup. A trading setup is a plan that determines when a trader should enter or exit. This plan is created based on various factors such as technical and fundamental analysis, key price levels and chart patterns.
In contrast, a trading strategy is a general plan that a trader uses to achieve his trading goals. This plan includes factors such as risk tolerance, time horizon and tools. In other words, a trading setup is a trigger that executes a trading strategy. Therefore, the setup can be considered a subset of the trading strategy.
The details of the trading setup are determined according to your needs and personality. For this reason, we recommend considering factors such as your risk tolerance and the experience and knowledge you have, to determine a trading setup in line with your big goal (trading strategy) and stick to it.
What does it mean to optimize the trading setup?
Optimizing the trading setup means improving and adjusting the terms and details of entering and exiting trades to achieve the best possible results in terms of profit and risk management. Optimizing the trading setup includes detailed analysis and changing various parameters and factors that can have a direct impact on trading performance. This optimization includes the following:
Improvement of entry and exit points
- Selection and combination of different technical indicators to identify more accurate entry and exit points.
- Examining and analyzing chart patterns to identify the best entry and exit points.
Adjusting the loss limit and profit limit levels
- Determining the appropriate level for the loss limit in such a way that the risk is minimized, but at the same time, the premature closing of the transactions is avoided.
- Setting profit target levels that are reasonable and achievable and help maximize profits.
Better risk management
- Calculating the appropriate size of positions to reduce risk and avoid large losses.
- Adjusting the ratio of risk to reward in each transaction so that transactions with high profit potential and lower risk are selected.
Testing and evaluation
- Using past data to test the trading setup and evaluate its performance.
- Test trading setup in live market conditions with demo account or small capital.
Review and update
- Checking and reviewing the performance of the trading setup periodically and making the necessary changes based on the results.
- Being ready to change the trading setup based on market conditions and new experiences.
Education and awareness
- Continuous learning about new analytical and trading tools, methods and techniques.
- Being aware of news and economic events that can affect the market and adjusting the trading setup based on them.
Trading setup in the heart of trading strategy
In this post, I discussed the difference between trading strategy and trading setup. Two concepts that are often confused. A trading strategy consists of setups that help the trader to perform better in his trades. In other words, you set your target under a trading strategy. Now, according to the goal, knowledge, tools and experience you have gained, you will choose a trading setup to achieve more profit. By knowing these two concepts, you can have a comprehensive plan to earn profit in the financial markets.