The Basics of Forex Trade Setups

What are forex trade setups?

A trade setup is a prespecified set of conditions in the market that a trader can use to identify an opportunity to engage in a trade. What it basically means is the conditions or signals that traders seek out in the market before they trade. Forex trade setups help traders to identify potential entry and exit points, allowing them to effectively manage risk, and engage in informed decision making, all of which are crucial to successful trading.

These setups draw upon factors like technical and fundamental analysis, as well as trading signals. Traders rely on these setups to decide the optimal times and methods for entering or exiting a trade. The nature of trade setups can differ significantly, shaped by the trader's strategy and the specific currency pairs involved.

How do Forex trade setups work?

Imagine a trade setup like a blueprint, or a set of instructions. The trade setup, based on analysis, clearly defines a set of rules and criteria to guide the trader’s actions. A specific time frame is used for analysis, as chosen by the trader. They may opt for short-term timeframes such as 5-minute or 15-minute charts, or for extended positions might go for longer time frames such as 1-hour or daily charts, depending on their trading style.

Let’s look at an example using the ‘Golden Cross’ analysis technique. The Golden Cross is a bullish technical formation which supports upward momentum in a current trend. When the averages cross over each other, this signifies to the trader that the trend is building momentum, and he should enter a trade.

Source: Tradingview.com

What are the basic trade setups?

There are three basic trade setups that we’ll take a look at.

• 1

  Trend Continuation: A trend continuation (this is often a ‘breakout’) trade setup involves identifying an existing trend and looking for opportunities to enter the trade in the direction of that trend. When the price breaks through a key resistance level in an uptrend, or support level in a downtrend, traders look to enter a trade

• 2

  Trend Reversal: This trade setup focuses on spotting changes in market direction and entering a trade at the beginning of the new trend. Traders focus on any sign that the current trend is losing strength, and then enter the market during the early stages of the new trend. Note that trading against the trend is associated with a higher level of risk

• 3

  Range-bound: A range-bound trade setup or ‘false breakout’, is suitable for sideways moving markets where prices fluctuate within a defined range. Trades try to identify key support and resistance levels. They then enter when the price appears to break out of the range but quickly reverses, indicating a false breakout

As you can see, the key to finding forex trading setsups is to determine the state of the market: either it is trending or is in a range.

How do I find forex setups?

Finding forex setups involves a combination of technical analysis, fundamental analysis, and an understanding of market dynamics. You can use these techniques and tools to look for forex trade setups:

• Price Closing: Traders can identify key price levels of support or resistance. The support level is where a price regularly stops falling and bounces back up, unable to drop past a certain price. The resistance level is the point where a price repeatedly stops and dips back down and cannot break through. If the price breaks out and closes outside (above/below) of these key support and resistance levels, traders can enter a trade

• Oscillator closing: Oscillators are chart indicators that traders can use to determine overbought and oversold levels. Oscillators such as RSI (Relative Strength Index) or Stochastic are analyzed, and if their readings close above or below certain levels, it may indicate potential price reversal points, signaling to the trader that they should trade

• MA Crossover: Traders can use the moving average (MA) indicator to calculate the long-term averages of a market’s movements. They then look for crossovers between short-term and long-term moving averages. A bullish crossover (short-term crossing above long-term) suggests a potential uptrend, and vice versa. Traders enter a trade at these crossover points

• Candlestick Analysis: Traders can use technical analysis by observing candlestick charts which display the highs, lows, open and closing of a security for a specific time period. Traders identify patterns such as engulfing, doji, or hammer candlestick patterns, which can provide insights into potential trend reversals, signifying a suitable time to enter a trade

• Chart patterns: Traders may use chart patterns as a tool for recognizing patterns like triangles, or head and shoulder patterns. The patterns indicate possible breakout or breakdown points, telling a trader that they should trade

• Fibonacci: Fibonacci retracement levels are horizontal lines which indicate support and resistance levels in price movements. Traders apply Fibonacci levels to identify potential retracement levels. Traders often look for reversals or continuations around these levels

• Holistic Approach: Traders can use a combination of fundamental analysis and technical analysis, along with risk management strategies, to form a comprehensive trading plan. They can use tools like charts, indicators, and patterns to analyze historical price data and predict future price movements

Best Forex brokers

1

9.4/10

Go to broker

eToro is a multi-asset investment platform. The value of your investments may go up or down. Your capital is at risk. Don’t invest unless you’re prepared to lose all the money you invest.

Minimum deposit:

$50, $100 (for UK clients)

Bonus for deposit:

0%

Regulation:

CySEC, FCA, ASIC

Review

The eToro broker was founded in 2007. The company promotes itself as a social trading platform working with traders from over 140 countries. The broker has several divisions operating under different jurisdictions and licensed by different regulators. For example, eToro (Europe) is licensed by the Cypriot regulator CySEC (109/10) and eToro (UK) is licensed by the British regulator FCA (583263). The broker also has a representative office in Australia and the USA. eToro Profile Details

Pros/Cons

•the minimum transaction amount for copying is $1;

•handy functionality for passive investing;

•regulated by independent monitors;

•it is possible to purchase contracts for fractional shares (that is, to invest amounts less than the cost of one share);

•it is possible to buy shares at once (not CFDs) on the US stock exchanges.

•high spreads;

•periodic technical failures in order execution;

•lack of the most popular platforms such as MetaTrader 4 and MetaTrader 5 in Europe and the CIS;

•no access to ECN systems, orders are processed only according to the STP (straight-through processing) scheme with access to specific liquidity providers;

•there is a commission for withdrawing funds;

•impolite support staff;

•inconvenient website.

Study Review

2

9.2/10

Go to broker

Your capital is at risk.

Minimum deposit:

No minimum

Bonus for deposit:

0%

Regulation:

FSC (BVI), ASIC, IIROC, FCA, CFTC, NFA

Review

The name OANDA is an acronym for “Olsen & Associates” or “Olsen AND Associates”. It is registered in the United States and provides its clients with a wide range of financial services in most countries of the world. The company was founded in 1996 and is currently regulated in four jurisdictions. The main regulator of the broker is the UK Financial Conduct Authority (FCA). Oanda Canada is licensed by IIROC. The company has several significant awards to its credit, including a victory in the category "Best Forex Trading Technologies" from the UK Forex Awards, "Best Trading Platform" from FX Week, as well as "Best Customer Service" from the US Foreign Exchange Report.

Pros/Cons

•Minimum deposit from 1 dollar.

•A large selection of the most popular trading instruments.

•Several reliable and reputable financial regulators.

•Inconvenient and poorly functioning site.

•Lack of cent accounts.

•Lack of bonus programs.

Study Review