Set ups - part 4

So now we know about trends and support and resistance.  From here we need to start honing in on more specifics on what we should look for in order to enter a new trade.

Stocks don't go up or down in a straight line.  They are kinda like an incoming or outgoing tide - they ebb and flow.  Have you ever seen a tide coming in?  It doesn't just come straight in from low tide to high tide in one big wave does it?  Of course not, it comes in, then goes back out, then comes in further then goes back out, then comes in further still and on and on until it hits high tide.  The same is true for a stock, particularly a trending stock.

An up trending stock will go up, then will come back a little, then will go up further, then come back a little again.  Another way of thinking of this is higher highs and higher lows - remember that from our trending lesson?

If you want to maximize your trade, would you want to get in at the top, or wait for the pullback (i.e. higher low) and get in then?  

You'd want to get in on a pullback.  This will maximize your gain and will help your risk to reward ratio, which we'll address at a later time.

For now, let's just look at the best place(s) to enter a trade for an uptrending stock.  Looking at the chart below you'll notice the higher highs (green circles) and higher lows (blue squares).  So, you would want to get in on a pullback, which would be as close to the blue squares (higher lows) as possible. 

This is what you are looking for regarding set ups.  You want a trending stock with easily identifiable highs and lows.

Now onto the actual details on entering a new trade.