Forex Set-ups

You can find more recent examples of Forex Set-ups in our Forex Blog.

What are Forex Set-ups

Forex Set-up is a criterion for opening a position, which determines an entry price and direction of trade. Once the set-up price is broken the trader will enter the position determined by the set-up. This could include shorting an instrument because they think the price will drop or going long because they expect an upward movement.

The set-up price can be determined based on technical or fundamental factors as well as personal opinion on the part of the trader. Usually reaching the set-up price is not enough to make a move. Generally traders wait for a significant break to confirm the trend will continue or additional confirmation by some technical indicator.

For example, if you're looking for the price of a EURUSD to go above 1.2500 before buying, the set-up price is 1.2500. It might be better for the price to exceed 1.2505 instead of purchasing as soon as 1.2500 is reached. Timing will depend on volume, volatility and many other factors affecting price movements.

The forex set-ups are suitable levels for opening a position. In most of the cases these are popular formations (chart patterns) among traders.

We know the intentions in the technical analysis tend to carry out themselves. That is because when we buy we increase the price and vice versa when we sell we decrease the market price. So it's important for a trader to know the standard forex set-ups. They have a real application in the forex trading.

Important Forex Set-ups

These are some of the most used forex set-ups.

123 Forex Set-up

Commonly used technical signal, the Forex 123 set-up usually marks a good entry point for the traders. This pattern is very common and can be found everywhere on price charts. A good way to avoid market randomness is to combine the 123 set-up with other indicators to make sure you have the right signal.

Most commonly used when the trend is changing this indicator can also work for other situations. It is generally recommended to use the 123 on longer time frames that filter some of the random market volatility.

Trades examine the route of the price from the top at point 1 to a temporary bottom at point 2 and then wait for the correction at point 3 to reverse direction again before spotting the formation of the set-up signal. It is important to notice that point 3 must be lower then the top at point 1. The time to enter the market is usually when the price breaks the point 2 level downwards but you must check the trend with other indicator to make sure you got the direction right. Good confirmation indicators for the short term trend are MACD, RSI or Stochastic (shown here). The sell signal is the combination of the price passing through level 2 and the signal from your indicator.

The same logic can be applied in the opposite direction for short position but the chart must be a reversed version of the one shown above.

Support / Resistance Levels

The resistance level test could prove an easy to spot entry signal with high chance of success. Basically it works when we observe how the price bounces off an existing support or resistance level and heads for the opposite direction. Price usually tests a resistance level 2 or 3 times before it changes direction.

It is very unlikely for a price to test a level more than 3 times before it will reverse the trend and take off in the opposite direction. However, it is much better to have another indicator to confirm our entry. In the example above we use the the Stochastic oscillator but others can be helpful too. This will make our strategy more reliable on the volatile markets of commonly traded currency pairs.

In this example we enter short either near to the resistance level or after breakout below the lower support level.

Exhaustion Spikes

The exhaustion spikes Forex set-up is a pattern that usually signals the changing of trend direction. It basically signals reversal in just two bars so you need to be quick to spot them in order to make profit.

It is generally accepted that such set-ups occur when the market reacts to news in periods of high volatility. The most important feature of the set-up figure is the size of the 2 bars. Their length should be significantly larger than the surrounding bars. The opposing up/down bars should also be close in size to each other. They should be easily recognizable on the chart.

We enter the market when the price breaks the range set by the two previous long bars downwards.

Using exhaustion spikes is a good way of making profit but traders must be careful as such a set-up usually forms in very volatile market environments and therefore some kind of protective stop loss should be used.

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