Simple trend following: a higher-timeframe filter and an ATR stop

Research status: untested hypothesis. No backtest, paper or live results exist. Every threshold, period, R value and risk fraction is an untested candidate parameter, not a recommendation. This is not the same playbook as Trend pullback, which stays on one timeframe and uses a 20-bar average reclaim to a prior high.

The idea

Chasing a rising market often means buying far from a stop. This playbook asks a simpler question: if a slower chart already says the trend is up, does waiting for a pullback on a faster chart, and placing the stop from volatility, give a cleaner test than buying strength? The trend filter lives on completed 4-hour bars. The entry, invalidation and size live on completed 1-hour bars. A written rule is not evidence of an edge.

IF–THEN rules

Averages and average true range (ATR) use completed bars only. No intrabar signals. ATR(14) is Wilder’s average of true range on the 1-hour series.

1. Higher-timeframe filter: on the latest completed 4-hour bar, the close is above SMA(50), and that SMA(50) is higher than it was 5 four-hour bars ago.
2. Pullback: a completed 1-hour bar trades at or below the 1-hour EMA(20), and its low stays above the lowest low of the previous 20 one-hour bars.
3. Reclaim: the next completed 1-hour bar (the signal bar) closes back above the 1-hour EMA(20).
4. THEN enter at the following bar’s first executable price, if all shared checks pass.

• Stop: the lower of (a) the pullback bar’s low minus max(2 ticks, 0.05 × ATR(14)), and (b) the signal close minus 1.5 × ATR(14). Frozen at entry. The stop must sit beyond the idea, not inside the noise — see the risk-and-invalidation lesson.
• Target: 2R after estimated costs, measured from the planned entry and the frozen stop. Frozen. If there isn’t room after costs, there’s no trade; don’t invent a further target.
• Invalidation exit: a completed 4-hour close below the 4-hour SMA(50) exits at the next 1-hour open (the stop has priority if it has already traded).
• Time stop: exit after 24 one-hour bars if nothing else has triggered.
• The stop is live intrabar the whole time. No adding, no widening, no trailing-stop reinterpretation. Size from the stop with the position-size calculator, at 0.25% of equity (an untested modeling parameter). Results are counted in R.

When NOT to trade

• The 4-hour filter is off, or the 4-hour SMA(50) has flattened enough that the “rising” test fails.
• Chop: the 1-hour close has crossed EMA(20) in alternating directions 4 or more times in the last 10 closes.
• The ATR stop is so wide that a 0.25% risk position is smaller than a viable lot, or so tight that costs eat the room to 2R.
• Any shared no-trade filter fails.
• Falling or two-sided markets: this is long-only. A short version is a separate hypothesis.

Common mistakes

• Entering the pullback before the reclaim close — that’s a different, untested idea, and it breaks Early Is Wrong.
• Building the 4-hour average from unfinished bars, or mixing exchange clocks so the filter and the entry disagree.
• Tightening the ATR stop after entry because the trade “should work.”
• Treating a 2R target as likely. Geometry is not probability.
• Running this next to Trend pullback as if they were one system. They share a family resemblance and must be tested, and sized, as separate hypotheses.

Hypothetical example (made-up prices)

Item	Value
4-hour close above a rising SMA(50)	✓
Pullback low 100.40 vs EMA(20) 100.80; ATR(14) 0.80	Pullback ✓
Signal close 101.10, back above EMA(20)	Reclaim ✓
Entry (next open)	101.20
Stop: lower of 100.40 − 0.04 and 101.10 − 1.20	99.90
Risk per unit incl. 0.06 costs	1.36
2R target after costs	103.86

If it works: price reaches 103.86 within 24 hours: about +2R. If it fails: price trades 99.90 and fills worse, at 99.84: a little more than −1R. Or a 4-hour close falls back through SMA(50) and exits on the next 1-hour open, wherever that is. A public study of a moving-average pullback on historical Bitcoin daily candles — education, not a result for this rule — is in technical examples.

Ratigan Capital rules in this playbook

• Early Is Wrong: buying the dip before the reclaim close is a different strategy.
• Never Average Down: if the reclaim fails, take the stop. Don’t buy more lower.
• Patience as a Position: most hours, and most 4-hour trends, produce no signal.
• Price Is the Only Truth: the averages and ATR describe past price; the stop is the stop.

Why it can fail

A rising 4-hour average can still be rising as a sharp drop begins, which is why the stop is independent of the filter. Pullback-and-reclaim rules have been studied for decades; trying many period combinations can make one look good by luck (see Sullivan, Timmermann & White, 1999). ATR can jump after a shock and push the stop so far away that the 2R target is no longer reachable after costs.

Pre-trade checklist

1. 4-hour trend filter true on completed closes?
2. 1-hour pullback and reclaim both true, with no 20-bar breakdown?
3. Not in chop; shared filters clear?
4. Stop, 2R target, time stop and size written; net ≥ 2R after costs?

Sources

• StockCharts ChartSchool: Moving averages
• StockCharts ChartSchool: Average True Range (ATR)
• Sullivan, Timmermann & White (1999), “Data-Snooping, Technical Trading Rule Performance, and the Bootstrap,” Journal of Finance (RePEc listing)
• Core rules for every playbook