What Does an A+ Day Trading Setup Look Like?

You see traders everywhere on social media talk about how “$XYZ was A+”, “or $XYZ was the opportunity of the year”. But rarely do they ever tell you the criteria that actually MAKES the setup A+.

Every trader will have a slightly different definition of an A+ setup. Today I will talk about what an A+ setup looks like for me. It doesn’t mean that when this setup occurs it means you should go all-in on it. It means this what I take “conviction size” on. 

But seeing the criteria I look for will help you understand what makes a setup A+, and how you can define the characteristics of your own A+ quality setups. Let’s start by looking at a trade on ULTA trade I took recently:

ULTA Short Play

UTLA about a week and a half ago was gapping down in response to a negative quarterly earnings reports. I took a short trade on it in the morning at $250, and covered in the $245-$240 range. Here is a screenshot of the entries and exits from our day trading chatroom:

day trading setups

The earnings breakdown setup is my favorite day trading setup. Let’s talk about the characteristics that made this a high-quality setup, and why I took it:

Low Float

The most explosive stocks have a low float. This means there are not many shares available for the public to trade. This means that it takes less volume to move the stock. We define a low float as a stock with more than 100 million shares, and ULTA made the cut with about 50-60 million.  

Earnings Catalyst

If you have been following me for a while you know how firmly I believe that a stock’s quarterly earnings reports are one of the most powerful fundamental catalysts. All of the most explosive and clean stock moves come from the reaction to quarterly earnings reports.

In this context, the earnings actually weren’t that bad. But here’s the biggest secret about earnings plays: The actual earnings report doesn’t really matter. Only the REACTION to the report. I’ve seen stocks tank after great earnings reports. I’ve also seen stock’s go to the moon after a negative one. Price action is always king.   

Large Range

Many of you with a small account might be thinking “ULTA is a $250 stock, why would I ever trade that.” When you do the math, you will realize you don’t need much buying power to grab a decent trade on this. You want to not focus on how much the the stock’s shares cost, but how much range it has. 

Even if you just shorted 50 shares of this, only $12,500 buying power, and caught just 5 points of the 20 points it moved that day, you would’ve made $250. That is a decent gain on any small-sized account. The price of the stock doesn’t matter. All that matters is its range. I’d rather trade this than $5 stock that only moves .20 a day. 

History of Running On Earnings

You can see almost every time ULTA reports earnings, the high relative volume comes into the name, and it typically has larger than average range. Look on its daily chart:

stock trading setups

This is a crucial characteristic of the earnings plays you chose to trade. You want to be in names that have a high probability of making a large move. If it hasn’t made a big move before on a past earnings report, there is a low probability that this earnings report will be the one that brings in volume and range. 

High Relative Volume

Notice on its daily chart how often high relative volume comes into the name. This means that more volume than normal comes into on the name during an earnings report. All explosive stocks need high relative volume because they are the result of an imbalance of supply or demand in the name. You also want to make sure you are trading stocks with liquidity so you can enter and exit with ease. Ideally at least 500K in average daily volume. 

Intraday Setup

Even if everything else on this list is checked off, if you don’t have an intraday setup, there’s no trade to be made. You can see how ULTA gave a nice ORB at the open to give you a high probability entry for a short:

I got short right under the $250 area and covered in pieces into the flush. If it just tanked right at the open without consolidating at all, I would’ve not taken the trade because there was no setup.

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