What is a Setup Price?

A setup price is an investor's predetermined point of entry that, once breached, initiates a position in that specific security, be it a stock, bond, currency, or any other type of financial instrument.

Key Takeaways

  • A setup price is an investor's predetermined point of entry that, once breached, initiates a position in that specific security, be it a stock, bond, currency, or any other type of financial instrument.
  • The setup price can be determined based on technical or fundamental factors, as well as personal opinion on the part of the trader, and can be placed at any price that the trader chooses.
  • Once the setup price is triggered, the trader will have an open position in that asset.

Understanding a 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, and can be placed at any price that the trader chooses. Usually the setup price is placed above a key resistance or below a key support, but this is not set in stone. This is done so as to provide confirmation that the price has, indeed, made a significant break, which increases the probability of the prevailing market trend continuing.

Once the setup price is triggered, the trader will have an open position in that asset. This may entail shorting a security, if they think the price will drop, or going long, if they expect an upward movement.

For example, if your analysis dictates that you should look for the price of a stock to go above $25 before buying, then it might be better to place the setup price at $25.25 instead of purchasing as soon as $25 is reached. While the price is important, one should also be cognizant of 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 an investor's intended goal. 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 zero or five—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.