What is Setup Price
A setup price is a price level predetermined as the point of entry into a specific security, stock, or currency. Once the setup price is broken the trader will enter the position determined by the setup. This could include shorting a stock because they think the price will drop or going long because they expect an upward movement.
BREAKING DOWN Setup Price
The setup price can be determined based on technical or fundamental factors as well as personal opinion on the part of the trader. Usually reaching the setup price is not enough to make a move. Generally traders wait for a significant break to confirm the trend will continue.
For example, if you're looking for the price of a stock to go above $25 before buying, the setup price is $25. It might be better for the price to exceed $25.05 instead of purchasing as soon as $25 is reached. Timing will depend on volume, volatility and many other factors affecting price movements.
Setup Price and Limit Orders
Using a limit order to take action on a setup price is an easy way to accomplish the goals of an investor.
Limit orders are used when an investor wants to restrict or "limit" the price paid (or received) for a security. This is done by specifying the maximum price at which a stock will be bought (or the minimum price at which it will be bought or sold). Once the price reaches the "limit," the order is normally filled at that price (or better) if there is sufficient trading volume at that level. On thinly traded issues, you may receive a "partial fill" meaning only part of your order was filled at the limit price. The biggest risk to limit orders is that they are partially filled or not filled at all.
As an example of how set prices and limit orders work together, consider Tech Company A is trading at $31 and you wish to buy shares at a $29 set price. An investor may regret this decision if Tech Company A trades down to $29.25, but then zooms upward, leaving the order unfilled. Or, it could trade down to $29 but only for a small number of shares; if your limit order is behind other limit orders at the same price, those orders must be filled before yours, and by that time the price may have headed back up.
When using limit orders, it may be smart to wait for the price to approach the limit you wish to pay before placing the order. One trick worth considering is using "odd ball" limits. Most investors place limits ending in the digits 0 or 5—for instance, buying at $25.10 or selling at $30.50. Consequently, limit orders tend to cluster around certain price points, making fills tougher since limit orders at the same price are filled by time priority.