Trend and momentum checkSteps 1 and 2: which way, and how strong.
Before you look for an entry, the momentum system runs 2 checks. The daily 200 EMA tells you which way to trade, and the gap between the 21 and 100 EMA, measured against the ATR, tells you whether the trend is strong enough.
2 checks before any entry
The first 2 steps of the momentum system decide whether a market deserves your attention at all. Step 1 asks which way the trend points. Step 2 asks whether that trend has enough strength behind it. Only when both answers are clear do you start looking for a place to get in.
Together they keep you out of weak, sideways markets, and on the side where price is already moving with strength.
Step 1: the trend
Step 1 is simple. Look at the 200 EMA on the daily timeframe. If price is clearly above it, the trend is bullish and you only look for buys. If price is clearly below it, the trend is bearish and you only look for sells.
That is all step 1 needs: the line and your eyes, with no other tools. The word that matters is clearly. The rule is meant to be read at a glance.
Step 2: the momentum
Step 2 checks the strength of the trend with the 2 EMAs on the 4-hour timeframe. For buys, the 21 EMA must be above the 100 EMA. For sells, it must be below.
Then you measure the gap. Take your price range tool and drag it from one EMA to the other to get the distance in pips. Compare that distance with the current value of the ATR, the 14-period ATR on the 6-hour timeframe. The gap has to be bigger than the ATR.
If it is, the momentum is strong and you can look for trades in the direction of the trend. If the gap is smaller than the ATR, the momentum is not strong enough. You do not force it. You wait until it is, and check again during the week, as the gap changes. The ATR follows recent volatility, so this yardstick adjusts by itself: a quiet market needs a smaller gap, a volatile one a bigger gap.
3 examples from the charts
The system’s own chart examples show how this looks in practice. In the first, price is clearly above the 200 EMA, the 21 EMA is above the 100 EMA, and the gap between them measures 102.2 pips against an ATR of 82.7 pips. The gap is bigger, so you look for buys.
The second is an extreme case: a gap of about 2 ATR, in a market so far above the 200 EMA that the line does not even show on the screen. The third is the bearish mirror image, so you look for sells. The table puts all 3 side by side.
| Example | EMA gap | ATR | Verdict |
|---|---|---|---|
| Above the 200 EMA, 21 over 100 | 102.2 pips | 82.7 pips | Strong: look for buys |
| Far above the 200 EMA, 21 over 100 | 412.8 pips | 201.7 pips | Strong: look for buys |
| Below the 200 EMA, 21 under 100 | 86.5 pips | 59.2 pips | Strong: look for sells |
Mistakes to avoid
- Looking for buys below the 200 EMA because a setup looks good. Step 1 rules out one side of the market completely.
- Skipping the measurement because the EMAs look far apart. Measure the gap in pips and compare it with the ATR every time.
In short
- Step 1: price clearly above the daily 200 EMA means buys only, and clearly below means sells only.
- Step 2: for buys the 21 EMA must be above the 100 EMA, for sells below it, and the gap between them must be bigger than the ATR.
- If the gap is smaller than the ATR, the momentum is not strong enough, so you wait instead of forcing a trade.
Questions
What if price sits right on the 200 EMA?
The rule asks for price clearly above or clearly below the line. If you cannot tell which at a glance, step 1 gives you no direction, so there is nothing to look for yet.
Key terms
- EMA (exponential moving average)
- A moving average that gives more weight to recent prices. A 21 EMA follows price closely, a 100 or 200 EMA shows the bigger trend.
- 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.
- Trend
- A market that makes higher highs and higher lows (uptrend) or lower highs and lower lows (downtrend).
- Pip
- The smallest standard price step in a currency pair. For most pairs it is the fourth decimal (0.0001), for yen pairs the second (0.01).