How Many Trade Set-ups Do You Really Need?

06/17/2015 6:00 am EST

Focus: STRATEGIES

Rob Colville

Founder and CEO, The Lazy Trader

What if a couple trade set-ups are all it takes to be successful, asks Rob Colville, of TheLazyTrader.com, all while setting out to answer the age-old question, “Is there such a thing as having too many set-ups?”

A recent ad touting something like “11 ‘Must-Have’ Trade Set-ups” got me thinking, so today I ask you, how many trade set-ups do you use now and is there a magic number that you someday aspire to have in your arsenal?

Now, far be it for me to discourage traders’ pursuit of education, mind you, but I’ll confess that even I wonder about the need to try and learn nearly a dozen distinct trade set-ups in one sitting. And sure, maybe you can build up to that in time, but even then, aren’t a dozen trade set-ups potentially too many to work with all at once anyway?

Let’s examine this issue, first by looking at why mastering one or two trade set-ups may be all you need to do to be successful, but also how you’ll know it’s time to add additional set-ups down the road and which types you should consider if/when that time comes. 

Why Entire Careers Can Be Built on One or Two Trade Set-ups

Many people think of the prototypical professional trader and picture someone confident, well-capitalized, and extremely knowledgeable, who trades countless different trade set-ups across practically any market. But did you know that most professional traders are self-described specialists with only a couple aces in their pocket, i.e. a handful of different set-ups they trade only on pre-determined markets and time frames?

Here’s why many traders can—and do—base their entire careers on only one or two primary trade set-ups:

  • Because It Works—These traders know what they trade and trade what they know—no more and no less—and it works for them. Funny, then, that one of the first big mistakes most new traders make is that they simply take the wrong approach, and while switching wildly between set-ups and strategies and trying to be a Jack-of-all-trades, they instead wind up becoming a master of none.
  • Because Less Is More—Don’t impose undue pressure on yourself by thinking that all good traders have unlimited trade set-ups at their disposal and expecting that you need that, too. Being able to start out each day with such a clear direction and looking for only very specific trade set-ups is a beautiful thing, so cherish that, because you’ll likely miss those days if you do someday expand your arsenal.
  • Because It Takes Time to Become a Master—Between countless hours of backtesting and demo trading, and then putting a set-up through its paces in real market conditions, you can log thousands of hours building comfort and familiarity with it, and even then you likely won’t know reasonably how that set-up will perform in extreme or outlying market conditions, the kinds that happen only once in a given market cycle.

NEXT PAGE: Corduroy and Slap Bracelets

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The Only 2 Reasons to Add Additional Trade Set-ups

Self-imposed pressure, outside influence, or any perceived cool factor aren’t valid reasons to go out and pursue new trade set-ups, but there are some reasons that are, although perhaps only two that matter most.

Alas, kind of like corduroy pants and slap bracelets, things do tend to come in and out of favor and trading does sometimes imitate life in that respect. So depending on how and what you trade, it may be necessary to change between set-ups at some point. Just know that the time to do so is not simply after a trusted set-up produces one or a couple losing trades. Here’s when you might want to sound the alarm, though:
   

  • Persistent Underperformance—You can’t argue with lousy results, and if, say, quarterly numbers show that something is just not performing anymore, then it probably has to go, although there’s one big caveat here. Before abandoning any once-effective trade set-up, make sure that the problem is really with the set-up, and not with the markets or the trader. Perhaps it’s only a matter of plan compliance, which is fixable, or maybe it’s a signal that the markets are changing…which brings us to our next point…
  • Changing Market Conditions—Uptrends and downtrends, breakouts and ranges, and high- and low-volatility market conditions are all just part of the cyclical and ever-changing nature of the markets. They come in and out and many set-ups come in and out of favor along with them. Knowledge—and plenty of testing and experience—will tell you whether you trade with seasonal or cyclical set-ups, and if so, you’ll react and be adaptive, and as the market and price action dictates, you’ll use qualifying trade set-ups accordingly. 

Conclusion

Perhaps not-so-delicately veiled in this article is the fact that I believe having a dozen or more trade set-ups in your arsenal could be overkill, especially since I’m The Lazy Trader.

To answer the initial question, though, I would say that if you have two or three proven trade set-ups that work in trending markets, and perhaps two or three (the same or different ones) for range-bound markets, it would stand to reason that you’re a reasonably well-equipped trader. This, however, is a matter of personal opinion.

By Rob Colville of TheLazyTrader.com

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