RS Trader Academy

Schools / School V — The Trade / Course 2

The setup checklist

After this lesson you can run any candidate through the five-layer checklist, in order, with each layer holding a veto.

Five questions, strictly ordered

By now the pieces all exist, and this course fixes their order. A setup gets checked top-down, from the biggest force to the smallest, because each layer sets the odds for everything beneath it, and a veto at the top makes the rest irrelevant. The sequence:

1. Regime. Is the market allowing this? (School IV, course 5: index against its averages, breadth, distribution count.) In a hostile regime the checklist ends here for new full-size entries, however beautiful the chart. It's also the veto beginners override most often.

2. Group. Is the stock's group in the upper ranks, and are peers confirming (School IV, course 4)? A leader in a leading group has the current behind it. A lonely chart in a lagging group has to be extraordinary before it goes ahead at all, and then at reduced size.

3. RS. Is the stock itself a leader — top decile against the index, RS line at or near highs, ideally having led through the last correction (School IV, courses 1–3)?

4. Structure. Is there a sound base or reference, a real Stage 2 with a definable level where the idea fails (School III)? This layer produces the stop, and course 1's extension test lives here. Without an honest stop there's nothing to size against.

5. Trigger. Has the actual event happened, the breakout through the ceiling or the reference holding or the reclaim close, on the right volume? Until it fires, the setup is a candidate, and candidates get watched rather than bought early "to get a good price." Buying before the trigger means buying a stock whose one distinguishing event hasn't occurred.

Then, and only then, School II's ritual: entry, stop, size, R, written down, order placed.

One candidate, walked

A realistic walk-through, compressed. The index: above a rising 50-day, breadth decent, two distribution days in the last month, so regime passes. The stock's group: ranked 8th of the ~100 industry groups, with two peers breaking out this fortnight, pass. The stock: up 60% over six months against the index's 12%, RS line at new highs last week while price still sat in its base, pass, and School IV, course 2's tell in the flesh. Structure: a seven-week base, floor €46.50, ceiling €52, volume drying through the final two weeks, pass, with an honest stop at €45.90 under the floor. Trigger: today it trades through €52.10 on triple average volume. Ritual: R = €100, €52.10 entry, €45.90 stop → €6.20/share → 16 shares. It's a small position, because a wide base puts the honest stop a long way from the entry and the division answers accordingly. The size the checklist hands you is part of its answer.

What the order buys

Run in this order, the checklist makes the expensive mistakes structurally difficult. A great chart in a collapsing market never gets past layer 1, and the lagging cousin of a hot stock fails at layers 2 and 3. The later layers catch the extended flyers and the entries taken too early. Each veto also tells you what to watch for next, whether that's a regime turning or a trigger finally firing. The Arena's challenge sets drill exactly this, five layers at a time against one candidate.

Check yourself

  1. Why does regime outrank a perfect chart? (The biggest layer sets the odds for all the others — most setups fail in hostile tides, this one included.)
  2. Layers 1–4 pass; the stock sits 2% below the base ceiling. What do you do? (Nothing. Watch. The trigger hasn't happened, and early entry buys a stock whose defining event may never come.)
  3. In the walk-through, why is 16 shares a feature rather than a disappointment? (The honest stop was far, so 1R buys few shares. The division kept the risk contract; a bigger position would have broken it.)

The habit this lesson installs

Regime, group, RS, structure, trigger — in that order, each with a veto.

Next: Course 3 — "Stops as craft."