I originally wrote this on the Online Traders Forum on the evening of the FVRR IPO June 13th, 2019.
A 'setup' is simply the anticipation of demand > supply or vice versa. Being able to identify a supply (resistance) level and anticipate a move up as demand (support) starts to 'breakout' a stock is key to being a successful short-term trader.
Demand can come in many forms: Perceived positive news, hedge fund buying, day-traders, algorithms, an Investment Advisor raises the target price so brokers call clients to get them to buy, shorts have to buy to cover, FOMO chasers, etc. It really doesn't matter why the buyers are present, but that you can identify this action and join the trend.
As a trader, our job is to anticipate the move as analyzed through the price action. Becoming emotionally invested in a news story or earnings report turns you into an investor rather than a trader. You'll find yourself not sticking to price action rules. Traders focus on price action, Investors follow stories, earnings, future valuation estimations; etc. If you want to be a serious short term trader live by this:
Know the news, Trade the action.
When to take profit or cut losses you ask? General principles: Knowing when a trend speeds up (Bump & Run) is a great identifier of a short-term top. 1) Sell into speed ups and/or uptrend fails. 2) Set a stop at even if the trade is working. Never let a winner turn into a loser. 3) Know your risk going into the trade, so if the breakout fails, you can bail and lose as little as possible. Save capital for the next trade. If you're worried about the pattern day-trade rule, check out a few solutions hereto calm your nerves.
Okay, enough education for one night, read the watchlist for 6/14/19 here. Including FVRR LYFT DIS NFLX & SNAP.