Stops, targets and rulesStep 5, and the rules you never bend.
A good entry is only half the system. The momentum system fixes the stop and the target with the ATR before you enter, and a short list of firm rules decides which trades it takes at all.
Step 5: fixed exits from the ATR
The momentum system uses a fixed stop-loss and a fixed take profit, both based on the ATR: the same 14-period ATR on the 6-hour timeframe that you use for the momentum check and the trigger. The stop goes 1 ATR away from your entry, and the take profit goes 2 ATR away. That gives every trade a risk to reward of 1:2, so you risk 1 unit to make 2.
If you want, you can stretch the target to 2.5 or 3 ATR, but never further than that. Which of these suits you best is something your journal reviews show over time.
With fixed exits, nothing about getting out is decided in the heat of the moment, when the pressure is highest. That is also why you do not move the stop or the target once the trade is open.
A worked example, start to finish
Here is a made-up trade through all 5 steps. EUR/USD is clearly above its daily 200 EMA, so you only look for buys. On the 4-hour timeframe the 21 EMA sits above the 100 EMA with a gap of 55 pips, while the 6-hour ATR is 40 pips. The gap is bigger, so the momentum is strong.
You mark a key level at 1.0800, a round number where price turned before, and set an alert. In the London session, price dips to the level and a bullish 1-hour candle rejects it with a body of 26 pips: more than half the ATR, which is 20 pips, and less than a full ATR.
You enter after the candle closes, at 1.0828. The stop goes 1 ATR lower at 1.0788, below the wick at 1.0794, and the target 2 ATR higher at 1.0908. The Economic Calendar shows no major release due in the next hours, so the trade is valid.
The rules you never bend
Then there are the rules that keep the system clean. It is built for currency pairs only, not stocks, commodities or indices. It enters on a reversal at a level, so a trigger that forms too far from the level does not count, and breakouts are not part of it. And you always know the calendar: no entries a few minutes or hours before a big scheduled event, such as a rate decision, the US jobs report or an inflation release, because a single release can move price further than your whole stop.
The table puts every step and rule of the system on one page.
| Rule | What it requires |
|---|---|
| Settings | 21 and 100 EMA on the 4-hour, 200 EMA on the daily, 14-period ATR on the 6-hour, all on a 1-hour chart |
| Trend | Price clearly above the daily 200 EMA for buys, clearly below for sells |
| Momentum | 21 EMA above the 100 EMA for buys, below for sells, with a gap bigger than 1 ATR |
| Entry area | A key level, ideally on a round number and a Fibonacci level, with an alert instead of an order |
| Trigger | A 1-hour candle in the trend direction that rejects the level, with a body of ½ to 1 ATR |
| Exits | Stop 1 ATR, target 2 ATR, stretched to 2.5 or 3 ATR at most |
| Measuring | The body only, never the wicks |
| Wick | The stop must cover the trigger candle’s wick |
| Sessions | London or New York only, never the Asian session |
| Markets | Currency pairs only |
| Calendar | No entries minutes or hours before a rate decision, the US jobs report or an inflation release |
Backtesting and practice
Backtesting means testing the rules on old charts. For this system, testing only the chart part is pointless, because the rules are meant to be used together with a fundamental outlook. If you want to backtest it, you also need the weekly outlooks from that time.
You should still practise, to get a feel for each step and avoid mistakes later: find 5 bullish and 5 bearish setups on past charts and mark every step on each.
Fixed exits, firm rules, and practice until every step is automatic.
In short
- The stop goes 1 ATR away and the target 2 ATR away, and the target can be stretched to 2.5 or 3 ATR but never further.
- The firm rules: currency pairs only, a reversal at a level rather than a breakout, the body only, London or New York only, and no entries shortly before big scheduled events.
- Backtesting the chart part alone is pointless, so practise instead: find 5 bullish and 5 bearish setups and mark every step.
Key terms
- ATR (average true range)
- The average size of a price bar over a period, usually 14 bars. A simple way to measure how much a market normally moves.
- Stop-loss
- An order that closes your trade at a set price to limit the loss. It belongs where your idea is proven wrong, not at a random distance.
- Take-profit
- An order that closes your trade at a set price to lock in the gain.
- Risk to reward
- How much you can win compared with how much you risk. At 1:2 you aim to make 2 for every 1 you risk.
- Backtest
- Testing a set of trading rules on past charts to see how they would have worked.
- Economic calendar
- A schedule of upcoming data releases and central bank events, with forecasts and previous values.