Trading Price Action Trends

Chapter 4

Bar Basics: Signal Bars, Entry Bars, Setups, and Candle Patterns

Traders look for setups all day long. A setup is a chart pattern composed of one or more bars that leads a trader to believe that an order can be placed that has a good chance of resulting in a profitable trade. In practice, every bar on the chart is a setup because the next bar always can be the start of a strong move in either direction. If the trade is in the direction of the recent or prevailing trend, it is with trend, and if it is in the opposite direction, it is countertrend. For example, if the recent trend is up and you buy, the setup was a with-trend setup. If instead you shorted, the setup that you used as the basis for your trade was a countertrend setup and your short was a countertrend trade.

A signal bar is always labeled in hindsight, after the bar has closed and after a trade is entered. As soon as your entry order is filled, the prior bar becomes a signal bar instead of just a setup bar and the current bar is the entry bar. The bar after entry is the follow-through bar, and it is always better when there is a second bar in the direction of your entry. Sometimes the market will go sideways for a bar or two before there is a follow-through bar, and this is still good because as long as there is follow-through, the odds of making more from your trade increase.

There are both bulls with buy stops above the high of the prior bar and bears with sell stops below the low of that same bar. There ...