Marty Schwartz's Favorite Setups: High-Probability Trades for the Experienced Trader

Marty Schwartz did not believe in reinventing the wheel. He had a handful of high-probability setups that he looked for day in and day out. These were the patterns that he had seen work time and time again, the bread-and-butter trades that formed the foundation of his profitability. For the experienced trader, mastering these setups can provide a significant edge in the market.

The 10-Period EMA Pullback

This was Schwartz’s signature setup. In a trending market, he would wait for a pullback to the 10-period EMA. This was his “buy zone” in an uptrend and his “sell zone” in a downtrend. He was not a bottom-picker or a top-caller. He was a trend-follower, and the 10-period EMA was his guide. The key to this setup was patience. He would not chase the market. He would wait for the market to come to him.

For example, if AMZN was in a strong uptrend on the daily chart, he would wait for a 1-3 day pullback to the 10-period EMA. He would then look for a bullish candlestick pattern, such as a hammer or a bullish engulfing candle, to confirm that the EMA was holding as support. This was his trigger to enter a long position, with a stop-loss placed just below the low of the entry candle.

The Breakout from Consolidation

Schwartz was a big fan of volatility. He knew that periods of low volatility were often followed by periods of high volatility. He would look for stocks that were consolidating in a tight trading range, a sign of a market in equilibrium. He would then wait for a breakout from this range on high volume. This was a sign that the equilibrium had been broken and a new trend was beginning.

He would often use the opening range breakout strategy, especially in index futures. He would mark the high and low of the first 30 or 60 minutes of trading and then place a buy stop above the high and a sell stop below the low. Whichever way the market broke, he was in the trade, riding the initial momentum of the day. This was a simple but effective way to capture the day’s primary trend.

The “Red Dog Reversal”

This was a more advanced setup that Schwartz used to fade a move. It was a counter-trend trade, but it was based on a specific set of criteria. He would look for a stock that had made a strong move in one direction and was now showing signs of exhaustion. He would then look for a reversal pattern, such as a key reversal day or a bearish engulfing pattern, to signal a potential change in trend.

For example, if a stock had been in a parabolic uptrend for several days and then had a day where it made a new high and then closed below the previous day’s low, this was a key reversal day. Schwartz would see this as a sign that the buyers were exhausted and the sellers were starting to take control. He would then look to short the stock, with a stop-loss above the high of the reversal day.

Conclusion

Marty Schwartz’s favorite setups were not complicated. They were based on the timeless principles of trend, momentum, and support and resistance. The key to his success was his ability to identify these setups in real-time and execute them with discipline. For the experienced trader, these setups can provide a solid foundation for a profitable trading strategy. It’s not about finding a new, exotic setup every day. It’s about mastering a few key setups and trading them with consistency.