Rule 1: Trade Only Confirmed Directional Momentum
Trend following begins with objective momentum confirmation, not prediction. Use a dual moving average structure—commonly the 50-period and 200-period simple moving averages—and require price to close above both for long candidates or below both for short candidates. Add a 14-period ADX filter and demand a reading above 25 to confirm that a directional move exists rather than range noise. This single rule eliminates most chop-driven losses and forces entries only when institutional order flow has already established a bias.
Rule 2: Enter on Pullbacks, Not Breakout Exhaustion
Chasing extended breakouts degrades risk-reward. Instead, define an entry trigger as a retracement of 30–50% toward the 20-period EMA within an established trend, followed by a bullish reversal candle (long) or bearish rejection candle (short) on above-average volume. This improves entry price, tightens stop distance, and raises the probability of a favorable follow-through. Breakout entries are permitted only when accompanied by volume exceeding the 20-period average by at least 50%.
Rule 3: Predefine Stop Placement Using Structure and ATR
Every position requires a stop before entry. Place initial stops beyond the most recent swing low (longs) or swing high (shorts), then buffer by 0.5× the 14-period ATR to avoid noise-triggered exits. Cap total risk per trade at 1% of account equity; with a 2% risk ceiling permitted only for accounts exceeding 100 consecutive disciplined trades. Position size is derived from stop distance, never chosen arbitrarily: Size = (Account Equity × Risk %) ÷ (Entry − Stop).
Rule 4: Scale Out at Measured Targets, Trail the Remainder
Trend following profits come from asymmetric exits. Take one-third of the position at 2R, one-third at 3R, and trail the final third with a 2× ATR chandelier exit or beneath the 50-period EMA. This locks gains while preserving upside participation in extended trends. Never move a stop against the position; trailing stops move in one direction only.
Rule 5: Enforce a Minimum 2:1 Reward-to-Risk Ratio
Reject any setup whose first measured target is less than twice the stop distance. This mathematical filter keeps expectancy positive even at win rates near 40%, which is typical for trend systems. Calculate the ratio before order entry and record it in the trade journal; setups failing the threshold are skipped without exception.
Rule 6: Trade a Defined Universe with Liquidity Screens
Restrict trading to instruments passing objective filters: average daily volume above the 50th percentile of the exchange, price above $10 (or equivalent), and no binary-event risk within five trading days. A focused watchlist of 20–40 liquid instruments across uncorrelated sectors prevents overtrading and concentration risk. Avoid correlated positions exceeding 2% aggregate risk in a single sector.
Rule 7: Align With Higher-Timeframe Trend
Require multi-timeframe agreement: a daily-chart trend signal must be supported by a weekly chart above its 30-week moving average (longs) or below it (shorts). Counter-trend and mean-reversion trades are excluded entirely. This filter historically reduces drawdown depth by filtering entries during major trend reversals and keeps the system on the correct side of institutional positioning.
Rule 8: Cap Portfolio Heat and Daily Losses
Limit total open risk across all positions to 6% of equity (portfolio heat), and halt new entries when daily realized losses reach 2%. After three consecutive losing trades, reduce position size by 50% until a winning trade restores full sizing. These circuit breakers prevent drawdown spirals and preserve capital for high-conviction setups.
Rule 9: Define Regime Filters for Market Conditions
Suspend long entries when the benchmark index trades below its 200-period moving average and volatility (VIX or equivalent) exceeds its 90th percentile; suspend shorts under the inverse conditions. Trend systems underperform in high-volatility mean-reverting regimes, so capital preservation during those periods is itself a trading rule, not discretion.
Rule 10: Journal Every Trade with Rule-Compliance Scoring
Log entry rationale, rule checklist completion, R-multiple outcome, and emotional state for every trade. Score each trade for rule compliance independent of profit; a profitable rule violation is treated as a failure. Review journals weekly and monthly, and pause trading for one week if compliance falls below 90%. Process discipline, measured and audited, is the variable most correlated with long-term consistency.
Rule 11: Backtest, Then Forward-Test Before Scaling
Validate any parameter change on at least ten years of data including a bear market, a bull market, and a range-bound period. Require a profit factor above 1.3, maximum drawdown under 25%, and at least 100 trades in the sample. Forward-test in real time for 60 trading days at minimum size before scaling. Never optimize parameters to the most recent 12 months; walk-forward analysis with out-of-sample validation is mandatory.
Rule 12: Automate Execution and Alerts
Codify entries, stops, targets, and sizing in platform alerts or scripts to remove hesitation and impulse. Manual overrides are permitted only for circuit-breaker rules, never for entries or exits. Automation enforces consistency, captures fills at intended prices, and produces clean execution data for ongoing system evaluation—closing the loop between rules, results, and refinement.
