The Momentum “Breakout” System generates 2 Macro Targets once a Trade Entry is confirmed. These are profit exits and are based on current Market Internals/Conditions. The basic strategy for trading the system is to sell a Contract(s) at each of the Targets.
How To Incorporate The System Macro Targets Into Your Trading
The basic concept of the Momentum Breakout system is that it isolates breakout zones where price can BREAK INTO the Free and Clear and RUN toward the next price obstacle in its path. The System Macro Targets are calculated to be HIGH PROBABILITY FILL zones before price gets to the next obstacle in it’s path which may halt further price movement in that direction. Targets and Stops are “dynamic”, based on the ATR’s and Ranges in the market – and adapt to any type of market environment.
There are various potential outcomes and scenarios when trading the Momentum Target System.
(1.) An Alert is issued after price breaks out of the Range, but there is no 1-minute close past the Trade Barrier (Alert Price).
So there is “no fill”. If the price reverses direction and breaks out of the opposite side of the Range a new Alert may be issued in the opposite direction. Many times an Alert that doesn’t fill will “go away” if the price moves far enough in the opposite direction. In other words if the price breaks out of the Range to the upside and an Alert is received, if there’s no 1-minute close past the alert price, then the trade isn’t “filled”. Remember that the Entry Trigger is a 1-minute closing price bar / candle past the Alert price when you see an active alert. When there’s no active alert the software will show “System Hunting Trade Setup”.
(2.) Price does not make it to Target 1 – and instead hits the initial Trailing Stop.
When this occurs the system will “reset” and look for the next entry. It may still use the current market structure and display the same Alert – in which case we are taking a “2nd attempt” using the same parameters. Sometimes the market will blast off in one direction (trigger us into a trade) then reverses before hitting T1 – resulting in a full stop-out. Frequently when this happens we will see another Alert in the opposite direction that often goes on to hit the Targets.
(3.) Price hits Target 1 but never makes it to Target 2 before hitting the Trailing Stop.
The system is designed so that when the price hits Target 1, the Initial Stop will trail and put the trade at or near “virtual break-even” meaning that if the price reverses at that point, the trade will result in a small gain or loss – depending on the fill and ranges in the market at that time. So once Target 1 gets hit (roughly 70-75% of the time) the trade is essentially “in the clear”. Depending on how price behavior manifests, many times the initial stop will “ratchet” prior to T1 getting hit, which also helps prevent full stop-outs).
Remember this important point – The Dynamic Trailing Stop gets the trade to Breakeven once Target 1 gets hit.
(4.) Price hits both Target 1 and Target 2.
By this time the Trailing Stop will have typically ratcheted-up to right around the Entry Confirmation level – meaning there’s no possibility of a loss on any remaining contracts – and you’ve already locked-in gains at both T1 and T2. Alerts that hit both Targets are considered a “big win” because Target 2 is generally a significant distance from the Entry.
Anytime an Alert hits both Target 1 and Target 2, when the price eventually tags the (ratcheted) Trailing Stop, the system will go offline for the remainder of that session.
(5.) Price hits Target 1 and 2 and continues to move in the direction of the Alert.
Once Target 2 is surpassed the Trailing Stop will continue to ratchet and attempt to stay in the move as long as possible. In this case if you are still holding a “runner” position simply follow the trailing stop or close the position shortly before the market close.
There will be cases where the Trailing Stop never gets hit during the market session. Sell any open positions before the market closes.
As you watch the System Alerts over a number of days and different types of market sessions you will see how the System generated macro targets act as PRICE MAGNETS and have a high degree of accuracy. Note: The 2 Target levels appear in the System Notes immediately after the “Entry Confirmation” message – once there has been a 1-minute close past the Trade Price Barrier, which “triggered-in” the trade. When the trailing stop gets hit, the system resets and the current Alert will disappear. The “Hunting Trade Setup” message will then show in the top section of the Alert Software.
Here’s a simple overview
Different Ways to Trade the Momentum Target System
A Trader can incorporate the System Macro Targets in one of several ways. The entire position can be held and exited at either of the Macro Targets or you can incorporate a scaling-out trade configuration. One approach is to pull a partial position off at each of the 2 Targets and then you’re out – waiting for the next alert. Another approach would be to enter with 3 contracts and sell one at each of the first 2 Targets – adjusting your stop along with the Trailing Stop – and simply let the trade play out. The methodology you use can be varied from day to day depending on the day type we are experiencing and the level of “Trendieness” we are seeing in the market for that day.
A 2-contract trader could simply shoot for Target 1 and Target 2 and then call it a day when they (or the trailing stop) are hit. Target 1 and Target 2 are high-probability targets with a high degree of success in getting hit. By the time price makes it to Target 2 the trailing stop on any remaining contracts should be around the Entry, meaning there’s no possibility of a loss on any remaining contracts.
Remember, the BIG POINTS are scored on long-range days, when the market makes a significant directional move and you want to participate in that – so the idea is to scale your way up to holding additional contracts as “runners” once both Targets get hit. Long-range days are guaranteed to occur in the market, but the frequency and number will vary based on market conditions.
Understanding The Auto Trailing Stop
The System Auto Trailing stop is designed for RUNNERS and TREND MOVES. i.e. once a trade takes off past the Alert Price the trailing stop will kick in and attempt to maintain a wide enough distance to allow for normal price fluctuation without knocking us out of the trade only to watch the market eventually make the directional move we anticipated.
It is recommended you place an INITIAL protective HARD STOP based on the initial trailing stop – and adjust your stop as the Trailing Stop moves. Once price is able to make it to the 1st Target you will see the Trailing Stop tighten up. At any point in time you may wish to protect gains or minimize losses by using a tighter stop than the current trailing stop. Remember – the System Trailing Stop is designed to stay far enough away from the current price so that normal price fluctuation and counter-trend moves won’t knock us out of a trade – and we can stay in for the bigger trend moves.
Remember this important point – The ES Momentum System incorporates a fixed “maximum stop” of 18.00 points. Generally speaking it’s rare to see the initial stop anywhere near 18 points, but in extremely volatile market conditions with wide ATR’s, the system will never take a stop-out greater than 18.00 ES points. There’s no max upside limit for the targets.
Once the market starts trending in our favor we will see scenarios where the price will be bracketed in between one of the Targets and the Trailing Stop. i.e. the trade becomes a WIN/WIN … we will be taken out by one or the other.. either results in a profitable trade.
Some days the market sucks us into a false move – we get filled and the price never makes it to Target 1. – subsequently reverses – goes all the way to the opposite side of the range – and stops us out. These days are relatively infrequent but inevitable. The good news is that the system is self-correcting – and over a larger series of Alerts (bigger data sample) – it has shown to be profitable in recent years.
The best approach is to evaluate the performance at the end of each week week. And don’t get hung up on each single Alert. Some days the first alert may get stopped out, but we get a subsequent alert that goes on to hit both Targets – resulting in a profit or near breakeven that session.
The Momentum Breakout System is designed to get us in on a Strong Trending Move – What we call a Trend Runner (significant point moves). Not every day will be a trending day, where price takes off in one direction and never looks back – but these days do occur frequently and that’s where the big money is made. As you follow the system over time you will see days where ES moves 20-50 points or more and it is possible to capture these type of moves by holding onto a position, even after the first 2 Targets are hit. These type of days will more than make up for “full stop out” days.
The success of any day will depend on the level of momentum in the market during the period we are actively trading it. On a super high momentum day… we may be able to both of the 2 Targets without breaking a sweat and then the price continues to move in our favor – resulting in a huge gain on any remaining contracts held past T2. Other days when there is little or no momentum it may be impossible to get any traction on our entries and we may suffer a full stop-out on our trade.
Understanding that the outcome of every trade depends entirely on the levels of Momentum (and that momentum can increase or decrease in the blink of an eye) will help you to become a better System Trader. Remember the job of the Momentum System is to alert us to the Breakout Areas based on a set of predefined criteria. That’s it. The follow-through and the success or failure of any given trade will be related to the strength of the Momentum in the market after we take our entry. (…as well as the degree of price volatility currently in the market.) We are “playing the odds”. The Momentum Target System wins over the cumulative series of trades even though we may experience periods of low momentum conditions that make trading tough and frustrating. (like a disgruntled surfer waiting for some good waves to come in.)
How to Interpret the System Notes
When you are trading the Momentum Target system you want to have the System Notes section expanded so you can follow along with the play-by-play action. The System Notes are automatically generated by the software each time something important happens.
Each trading day at 9:35 Eastern Time you will see a note posted that the system is online. This is when you will also see the Dynamic Trigger Range appear. When the system generates a Trade Alert you will see the line appear in the system notes and whether it’s a Long or short and the “Alert Price”. As you know, an alert is not “triggered in” until / unless there is a 1-minute close past the Alert Price / Trade Price Barrier so there will be times when you see an alert in the Notes that didn’t get filled.
Here’s an example of an Alert to go Long at 9:45 that didn’t trigger because there was no 1-minute close past the Alert price.
So what happened in the example above is that the price initially broke above the high of the Dynamic Trigger Range and the system gave an alert to go Long at 4144.75. That alert never triggered and then the price reversed back down and broke below the bottom of the Dynamic Trigger Range. You can see that an Alert to go Short was issued at 9:46.
Once there’s a 1-minute close past the Alert Price, you will see a confirmation line appear in the System Notes “Entry Confirmation” at the exact price of the 1-minute closing price bar “past the Alert price”, and you will see the “initial stop” on that same line. Another new line will print right above that Note that shows the levels for both Target 1 and Target 2.
When (if) Target 1 gets hit, the System notes will automatically post a line “Target 1 hit at at…” the level for Target 1. When (if) Target 2 gets hit there won’t be any more targets. The system only issues 2 Targets per alert. After T2 gets hit then the Dynamic Target block goes blank and the Trailing Stop takes over – which you would follow with any remaining contracts.
NOTE: At the point in time that Target 2 gets hit, you want to have your stop at least at breakeven on any remaining contracts – no matter what the trailing stop in the software shows.
Dealing With A Full Stop-Out
As mentioned, there will be “Trend Failure Days” and Alerts that just don’t get any “traction” – and the Alert will take a full stop-out. This is where the price breaks out of the Range in one direction and isn’t able to make it to the 1st Target, then the trend reverses and the price moves in the opposite direction all the way to the Trailing Stop on the other side of the Range.
Important Note: The “initial trailing stop” always starts off 1-tick past the opposite side of the Trigger Range – with one exception. The Momentum System employs an 18.00 point “fixed max stop”.
The system will never take a stop-out over 18 points per Contract. This provides a maximum risk on any given alert. There is no upside limit. Keep in mind that it is rare to see the “max stop” in play and typically the initial stop is way less than 18.00 points. The fixed max stop only comes into play during extremely volatile market conditions.
Depending on the ranges at the time the full stop out can be a few points or something more significant. Generally speaking a full stop-out will wipe out the profits from an Alert when the price hits both Targets. The full stop out day is the worse case scenario but you want to accept that they will happen and it’s a function of the market price action. The price breaks out of the range with just enough follow-through to trigger us into a trade, but just doesn’t have enough “forward thrust” to make to the first target before it reverses.
There will be times where we get triggered in a trade and then the price reverses and moves back into the Trigger Range – then turns back around in the direction of our trade and continues on to hit the Targets. This is why the Trailing Stop starts off wide enough to allow for normal price fluctuation. The Trailing stop is designed to hang-back and sometimes appears to move slow. Sometimes the Trailing Stop will ratchet prior to Target 1 getting hit – and sometimes it won’t. It depends on the approach and how close price gets to T1. In the case of a full stop out, there wasn’t enough of (or any) follow-through for the Trailing Stop to tighten.
Typically a full stop out will happen on non-trending, indecisive and choppy days. Many times when this happens early in the session, a second Alert might get triggered in the opposite direction and work out well. Remember, every market session / “day type” is slightly different and we are playing the odds that the market will serve us up enough trending days to hit multiple targets which will make up for stop outs over a longer series of trades.
Watch this short video about Day Types and Stop-Outs
Watch this short video about dealing with Drawdown Periods