50 Pips a day: A technical breakdown of the momentum strategy
In the world of intraday forex trading, '50 pips a day' has become a standard benchmark for traders seeking consistent daily returns. While the goal sounds simple, achieving it requires a disciplined approach to market volatility, timing, and risk management. This strategy is primarily built around 'momentum'—the tendency of price to continue moving in a specific direction once a trend is established. We look at the mechanics of the 50-pip momentum strategy and the technical indicators used to execute it.
The core principle: Capturing session momentum
The most effective time to execute a momentum strategy is during the 'London session' or the 'New York crossover.' These windows provide the highest liquidity and the most significant price moves. The strategy does not aim to catch the entire daily range but rather a high-probability 'slice' of the volatility that occurs when institutional traders enter the market.
Technical setup and indicators
To identify a high-probability momentum setup, we combine three technical components: Trend filters, Entry triggers, and Volatility measures.
1. Trend Filter: Exponential Moving Averages (EMA)
We use two EMAs to determine the immediate direction of the trend:
- 7-period EMA (Fast): Tracks short-term momentum.
- 21-period EMA (Slow): Acts as the dynamic baseline for the trend.
The Rule: If the 7-EMA is above the 21-EMA, we only look for 'Buy' (Long) setups. If the 7-EMA is below the 21-EMA, we only look for 'Sell' (Short) setups.
2. The Trigger: London session breakout
A popular execution method involves the 'London Breakout.' We monitor the high and low of the 1-hour candle immediately preceding the London open (typically 7:00 AM to 8:00 AM GMT). A break above the high or below the low of this range often signals the momentum direction for the remainder of the morning.
3. Confirmation: RSI and ATR
- Relative Strength Index (RSI): We use a 14-period RSI to ensure we are not entering 'at the end' of a move. For a long trade, the RSI should be above 50 but below 70 (to avoid overbought conditions).
- Average True Range (ATR): We check the 14-day ATR to ensure the pair has enough daily 'fuel' to reach our 50-pip target. If a pair like EUR/GBP only has a daily ATR of 45 pips, aiming for 50 pips in a single move is statistically unlikely.
Executing the trade
- Entry: Enter when the price breaks the 1-hour pre-market range in the direction of the EMA crossover.
- Stop Loss: Place the stop loss 5–10 pips below the recent swing low or the opposite side of the breakout range. Generally, the stop loss should not exceed 20–25 pips to maintain a 1:2 risk-to-reward ratio.
- Take Profit: Set the target at 50 pips. Alternatively, take partial profits at 25 pips and move the stop loss to 'break-even' to protect against a reversal.
The reality of the 50-pip goal
It is vital to understand that the market does not provide 50 pips of clean momentum every day. On days when the market is 'ranging' (moving sideways) or when major economic data is pending, this strategy can produce 'whipsaws'—where the price triggers an entry and then immediately reverses.
Risk Management Rules:
- The 2% Rule: Never risk more than 2% of your account balance on a single trade. If you have a £10,000 account, your maximum loss on any 50-pip attempt should be £200.
- Daily Stop: If you hit two consecutive losses in a single day, stop trading. Over-trading in a low-momentum environment is the most common cause of account 'blowouts.'
Summary
The 50 pips a day strategy is a powerful tool when applied to high-liquidity pairs like GBP/USD or EUR/USD. Success depends on patience—waiting for the right session opening and the alignment of EMAs—and the discipline to walk away when the market conditions are not conducive to momentum. It is a technical framework designed to exploit volatility, not a guarantee of daily profit.