If you have a job and thirty minutes an evening, this is the strategy that fits. It requires no intraday monitoring, generates few trades, and pays almost nothing in costs relative to the size of the moves it targets.
Why it works
It combines two of the better-documented effects in markets. Momentum: assets that have performed well tend to continue over intermediate horizons. Mean reversion within a trend: prices oscillate around their moving average, so entering on the pullback is structurally better than entering on the extension.
The 200-day filter is the workhorse. Restricting yourself to instruments above it removes the entire category of trades where you are buying something in a structural downtrend — which is where a large share of beginner losses live.
Market conditions required
- Price above the 200 EMA on the daily chart for longs.
- The 200 EMA sloping up, not flat. A flat long-term average means no trend.
- Higher highs and higher lows visible on the daily.
- Pullback, not collapse. An orderly retracement into the 20 EMA, not a gap down through it.
Setup
| Setting | Value | Purpose |
|---|---|---|
| Trend filter | 200 EMA, daily | Decides whether you may trade the instrument at all |
| Entry zone | 20 EMA, daily | Approximates the trend's average cost |
| Volatility | ATR(14) | Sets the stop buffer and position size |
| Timeframe | Daily primary, 4-hour for refinement | One evening check is enough |
Entry rules
- Price is above a rising 200 EMA.
- Price pulls back and touches or slightly penetrates the 20 EMA.
- A daily candle closes back above the 20 EMA, ideally with a lower wick showing rejection.
- Enter at the next day's open, or on a 4-hour break of that candle's high.
Stop-loss rules
Below the pullback low, minus roughly 0.5× ATR(14). On a daily chart this will often be 5–10% away on a stock, which is exactly why the position must be small. The stop distance sets the size, never the reverse.
Take-profit rules
- T1: the prior swing high. Take a third to a half.
- Runner: trail below each new daily swing low. This is where the strategy earns its keep — occasional 4R–6R trends pay for the many small losses.
- Exit signal: a daily close below the 20 EMA that also breaks the most recent swing low.
Risk management
- 1% per position, and no more than 4–6% total open risk across all positions.
- Avoid five positions in the same sector — that is one bet. See risk management on correlation.
- Use the position size calculator; wide daily stops make mental arithmetic unreliable.
Example winning trade
A large-cap stock, daily. Price above a rising 200 EMA for four months. It pulls back from £142 to £128, touching the 20 EMA at £129, and the daily candle closes at £131 with a long lower wick.
Entry £132 the next morning, stop £124 below the pullback low with ATR buffer, £8 of risk. T1 at the prior high £142 hit three weeks later for +1.25R on half. The remainder trails to £163 over two months before a daily close below the 20 EMA exits it — approximately +3.9R.
Example losing trade
An index ETF, daily. Above the 200 EMA, pullback to the 20 EMA, bullish close. Entry at 412, stop 398.
Three days later an inflation print comes in hot, the index gaps down to 402 and grinds to 396. Stopped for −1R.
Nothing was wrong with the setup — this is what the losing half of a positive-expectancy strategy looks like. The only avoidable element was position size: the trade was entered two days before a scheduled CPI release, which was on the calendar.
When NOT to trade it
- Price below the 200 EMA. There is no discretion here; it is the filter.
- A flat 200 EMA with price chopping across it.
- Immediately before earnings on an individual stock.
- When the pullback is a collapse — large red candles closing on their lows.
- When the prior swing high is so close that T1 is under 1.5× the stop.
Common mistakes
- 1Buying below the 200 EMA because it looks cheap
This converts a trend strategy into catching a falling knife.
- 2Sizing from the position you want rather than the stop
Daily stops are wide. The position must be correspondingly small.
- 3Exiting at T1 every time
The runners pay for everything. Cutting them all at 1R produces a strategy that cannot make money.
- 4Checking it intraday
Watching a daily-timeframe position on a 5-minute chart is how well-reasoned swing trades get closed for no reason.
Backtesting considerations
- Test across a full cycle including a bear market — trend strategies look extraordinary in a bull run and very different otherwise.
- Include dividends and financing costs for anything held for weeks.
- Compare fixed 2R exits against trailing exits; on trend strategies the trail almost always wins, and seeing that in your own data is what makes it possible to hold.