2+ consecutive higher highs on daily bars. Enter at next day's open. Longs only.
Fresh entries only. After an exit, wait for the state to reset (close below SMA(20)Simple Moving Average of the last 20 daily closing prices. Acts as a trend filter and trailing stop reference.) before taking a new signal.
Phase 1: When SMA(20)-3 is above your entry (common on dip-buy entries), place a disaster stop at entry minus 200 pts. This is black swan protection. It has never been hit in 6 years of data.
Phase 2: Once SMA(20)-3 drops below your entry, switch to the SMA trailing stop. From here, it only ratchets up. No profit target. No time exit.
This is the most common mistake new traders make with this strategy. Read this carefully.
You see two green candles in a row after a selloff. Your instinct says: "The trend is back. I should buy at tomorrow's open."
That instinct is wrong. Here's why.
A green candle means the close was above the open. That tells you nothing about whether the high was above yesterday's high. A small green candle can have a lower high than yesterday. A red candle can have a higher high than yesterday. Colour does not matter. Only the highs matter.
Walk through it day by day.
You've seen a big red candle, then two green candles. It looks like a reversal. Your gut says buy. But you only have one higher high. The signal has not fired. If you enter here, you're guessing, not following the system.
You cannot use today's high to make today's decision. Today's high is not known until the bar closes. So the signal fires at the close of the second higher-high day, and the entry is at the next day's open. You are always one bar behind. That is not a flaw. That is how you avoid lookahead bias.
If you enter after 1 higher high instead of 2, you are taking trades that haven't passed the signal threshold. In the data, requiring 2 consecutive higher highs filters out bounces that fail. Single higher highs happen all the time during selloffs. Most of them reverse the next day. The second higher high is the confirmation that momentum has actually shifted.
Entering early means more trades, more losers, and a lower profit factor. The patience to wait for the second HH is part of the edge.
No trade. Green candles with lower highs mean the body is positive (close > open) but the range is dropping. The market is bouncing weakly. The highs are what matter because the high is the furthest price was willing to go. If that ceiling is falling, there is no trend to ride.
This is the most common misread. Two green candles after a selloff feel like a reversal. But if the highs aren't expanding, the sellers are still in control. Wait for the highs to confirm.
You get stopped out. The trade is over. Now what?
The system doesn't sulk. It follows a simple re-entry sequence:
This happens faster than you might expect. In the real data, the system re-entered within 1 to 3 trading days of a stop-out on multiple occasions:
| Stopped out | Re-entered | Gap | Next trade result |
|---|---|---|---|
| Sep 14, 2020 | Sep 16 | 1 day | +11 pts |
| Sep 25, 2020 | Sep 29 | 1 day | +31 pts |
| Apr 2, 2020 | Apr 6 | 2 days | +264 pts |
| Aug 9, 2024 | Aug 13 | 1 day | +58 pts |
| Mar 27, 2020 | Apr 1 | 2 days | +163 pts |
Some of the biggest winners came immediately after a stop-out. Trade 5 (+264 pts, 26 days) entered just 2 days after Trade 4 was stopped. If you'd sat out to "wait and see," you'd have missed $1,320.
This is why mechanical rules matter. After a loss, your instinct is to hesitate. The system's instinct is to take the next valid signal. The data shows the system is right.
Price made 2 consecutive higher highs yesterday. You entered at today's open per the rules. Today the market gaps down and closes below the SMA(20).
What do you do?
A) Correct. The entry signal triggered at yesterday's close. You entered at today's open. That's done. What happens after your entry is the stop's job, not yours.
The SMA(20)-3 trailing stop will handle the exit. If price keeps falling, the stop catches you. If it recovers, you're in the trade. No discretionary overrides. No second-guessing. The whole point of mechanical rules is that you follow them mechanically.
You know the edge, the signal, and the rules. Module 4 explains why the exit mechanism is more important than the entry.
Module 4: The Stop IS the Strategy →