A setup with objective criteria

The setup is the line on the plan that most traders get wrong, and they get it wrong in the same way: they describe a picture instead of a condition. "A clean pullback into support in a strong uptrend" is a picture. Everyone has a slightly different one, and yours changes with your mood. A condition is something a script could check.

The stranger test, applied

Take your current setup description and imagine handing it to someone who has never seen you trade, along with a chart, and asking "is the setup present right now, yes or no?" If they would have to ask you a clarifying question, the description is not finished.

Common words that fail: strong, weak, clean, clear, obvious, momentum, support, resistance, overbought, extended, healthy, choppy. Every one of those can be replaced by a measurable version:

The numbers in the right column are examples, not recommendations. What matters is that each one has a number, so that two people get the same answer.

Four to six conditions

A setup with one condition is too common; it will fire constantly and the edge, if any, will be tiny. A setup with ten conditions will fire twice a year and you will never build a sample. Four to six is the practical range.

Order them from broadest to narrowest, so that a glance at the chart eliminates most candidates at the first box:

1. Context: what the higher time frame has to look like.
2. Location: where price has to be relative to a defined level.
3. Trigger: the specific bar or event that says "now".
4. Confirmation: one measurable thing that has to accompany the trigger.
5. Timing: a window within which the trigger has to occur.

Example, for a pullback long on a 5-minute chart:

• Context: 1-hour 20 EMA above 50 EMA, both rising for at least 10 bars.
• Location: price within 0.25 ATR(14) of the 5-minute 20 EMA after at least 3 lower-high bars.
• Trigger: a 5-minute close above the previous bar's high.
• Confirmation: trigger bar volume above the 20-bar average.
• Timing: trigger occurs between 09:45 and 11:15 ET.

All five must be true. Not "mostly true". Not "four of five and the fifth is close".

Key idea: A setup is four to six measurable conditions, all of which must be true, that a stranger could verify from a chart without asking you anything.

What happens to discretion

New traders worry that this removes the "art" of trading. It does, for now, and that is the point. Discretion is a privilege earned with data. Once you have 100 trades of a fully mechanical setup logged, you can start asking whether a discretionary filter improves the numbers, and you will be able to answer, because you will have a baseline. Without the baseline, discretion is just a name for changing the rules trade by trade.

The reading charts and candlesticks and support/resistance courses give you the vocabulary; this lesson is about turning that vocabulary into conditions.

One setup

Start with one. Not three, not "a breakout setup and a reversal setup". One setup, on one market, in one session, until the sample is large enough to say something about it. Module 5 covers when to add a second, and the answer involves a number of trades, not a number of weeks.

The reason is the same as everywhere in this course: you cannot tell what is working if several things are happening at once. A trader running three setups with 20 trades each has three samples too small to read. A trader running one with 60 has a sample.

Try it: Write your current setup as a five-line checklist using the context/location/trigger/confirmation/timing structure. For each line, write the number that makes it verifiable. Then open a chart, pick ten random days, and mark for each one whether the setup was present. If you hesitate on any day, the checklist still has a picture word in it.

Recap

• A setup describes a condition, not a picture. Every adjective is replaced by a number.
• Four to six conditions, all must be true, ordered context, location, trigger, confirmation, timing.
• Discretion is earned with data. Trade mechanically until there is a baseline to compare against.
• One setup, one market, one session, until the sample is large enough to read.
• If you hesitate when checking the checklist against a chart, the checklist is not finished.