What Is Setup Price?
A setup price is an investor's predetermined price 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. It is also known as an entry point.
- A setup price refers to the price at which an investor initiates a new position or strategy.
- The setup price, or entry point, can be arrived at in several ways, including technical or fundamental measures, or a combination of both.
- Once the setup price is triggered, the trader will have an open position in that asset.
- A good entry point is often the first step in achieving a successful trade.
Understanding 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 dependent on the trader's analysis of whether the market is rangebound or trending.
In a rangebound market, the setup price will be placed just below a key resistance or above a key support level, but this is not set in stone. Conversely, in a trending market, the setup price is placed above the key resistance and below the key support level. 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, currently trading at $24, to go above $25 before buying, then it might be better to place the setup price at $25.25 instead of purchasing it now or as $25 is reached. While the price is important, one should also be cognizant of volume, volatility, and many other factors affecting price movements.
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.
Determining both an entry point and exit point in advance is important for maximizing returns. Investors must ensure there is sufficient distance between the entry and exit point to allow a risk-reward ratio that is conducive to sustained portfolio growth.
Setup Price Example Using Limit Order
As an example of how set prices and limit orders work together, consider Tech Company A is trading at $31 and an investor wishes to buy shares at $29. They 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 "oddball" limits. Most investors place limits ending in the digits zero or five—for instance, buying at $25.10 or selling at $30.25. 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.