How To Use Repeatable Setups To Gain a Trading Edge

Louis Sykes
March 2, 2022

As a trader, it's your job to find an edge.

There's quite literally an infinite amount of strategies, systems, and indicators you can integrate into your process.

But, at the end of the day, mastering just a select few will likely generate alpha as opposed to creating inconsistency in your approach.

Think about it: If you go to the gym, you have a structured program. You don't go to the gym and aimlessly decide on random exercises. You have a rigid plan that you're going to build on top of the lifts you did the workout before.

Trading's the same.

You don't need to switch between every time frame, make every decision using a different indicator from the last, or follow someone else with different objectives from yourself into our trade.

You find repeatable setups where you can find your edge.

For instance, you may only trade in the aftermath of liquidity cascade events that take place a handful of times every year. Mastered well enough, a few well-calculated trades in similar conditions can make your entire year.

In day-to-day life, being a "Jack of all trades, master of none" might serve you well.

But, when it comes to trading, I'd argue the opposite's true.

At our shop, we have a K.I.S.S (Keep It Simple, Stupid) approach to a good majority of our trades.

We can reduce 95% of all our trades into four setups. These are the setups that work best for us.

Let's break these down in greater detail.

The Breakout

This is our favorite of them all.

There's nothing more bullish than when an asset breaks to new highs following an accumulation base.

Bases are formed by accumulation from people with a lot of money that needs to be put to work. Institutions — or, in the case of crypto, whales — need liquidity to enter long-term spot positions.

They don’t have the luxury of more nimble traders who are able to enter and exit at will and start long-term positions when momentum heats up on a breakout.

They need liquidity, and there’s plenty of it when retail capitulates and sells their coins down in bear markets.

Unlike what university professors will argue, prices don’t fall under a normal distribution, and they do have memory.

A high concentration of coins are likely to have their cost basis established during this accumulation, meaning that if the breakout does fail, there is likely to be support not far off to stabilize prices.

There isn’t this same type of support when the market moves lower following an extended uptrend because fewer coins have their cost basis close to current market prices.

The second reason we love these bases is they allow us to enter into asymmetric risk-versus-reward positions.

If the market is above the breakout level, we own it.

If it’s not, it’s someone else’s problem.

Using this simple rule, we can enter into long positions where the risk versus reward can be as high as 1-to-10, 1-to-20, even 1-to-30.

Even if we make a dozen trades that go against us, one winning position can make us incredibly profitable.

Here's an example using Axie Infinity $AXS from last year, one of our biggest winners:

The Trend Break

Big base breakouts tend to result in sustained periods of strength, so they're great setups for those with more intermediate/longer time horizons.

Though, intraday breakouts for the day trader time frame tend to be MM-driven liquidity grab events, and have a much higher probability of whipsaw and failure.

For shorter time frames, buying the downtrend break following contraction in price action are pretty high conviction setups. This looks to take advantage of a quick pop, as opposed to betting on a sustained primary uptrend.

Here's a great example using Fantom $FTM in the latter stages of last year:

We can buy during the contraction phase or on the upside break. In either case, we have a tight stop either below the lows of consolidation or breakout.

The Support Buy

As the name suggests, with this setup, we're buying the dip in a responsible manner.

Buying dips back to support are good trades to average down, with a tight invalidation right below support.

Here's Bitcoin $BTC in the summer. It might've been a lackluster two months, but prices never broke below this macro support, and you would've never got stopped out with this strategy.

The trade here was always to be long Bitcoin if and only if it was above 30,000:

The "Oopsies!"

Apart from our standard base breakout setup, this is a close contender to our favorite setup.

The best retests are the ones that undercut those prior lows and quickly recover back above it. Some of the greatest moves of an all-time high were sparked by exactly that.

We recommend you read this old post of ours as a primer on how powerful this setup can be.

Think back to after the onset of the pandemic.

Ethereum quickly recovered above its December lows within a few days of the pandemic lows. And, when Bitcoin retested its respective December lows, it quickly reclaimed them.

These two failed breakdowns signified the beginning of one of the most powerful periods these markets have ever seen:

And, of course, this works on shorter time frames.

Here's an example of Kusama $KSM going back to last summer.

On the last lower low, momentum was putting in a higher low. When prices recovered back above that support zone, the bullish divergence was confirmed, and a squeeze ensued:

What's the Takeaway?

These are four reliable setups we've found and lean on for a good portion of our analysis and execution.

But, more broadly, we encourage you to dig into the charts, piece together a trading plan, and figure out for yourself what works best for you.

You may have a shorter time frame, so you avoid the long-term breakouts and focus more on trendlines, volume, or order flow. If that works for you, great!

Much of the edge that comes from trading is finding a style that suits your own preferences, risk tolerance, goals, and overall investment objectives.

One of the biggest competitive advantages a trader can have in these markets is to have a repeatable, reliable arsenal of setups they can scan and execute on.

These four setups we've found value in utilizing for our process.

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Thanks for reading, and please let us know if you have any questions!

Allstarcharts Team

 

 

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