Setup criteria — what must be true before you even consider the trade
Setup criteria are the structural conditions that define the pattern. They are not opinions. They are observable facts on the chart or the tape. A breakout strategy on a liquid mid-cap gainer might require: relative volume above 3x, gap up between 4% and 12% on news, prior day high cleanly defined, a float under 50M shares, and a flat 5-minute opening range. If any one of those is missing, the setup does not exist yet — full stop. The discipline here is to be honest about absence rather than rationalising a near-miss into a "good enough" entry.
Entry trigger — the precise signal that fires the order
The trigger is the moment you stop watching and start acting. It should be a single event you could record on video and replay. "Looks strong" is not a trigger. "First 1-minute candle that closes above the opening-range high on volume greater than the prior bar" is a trigger. The reason this matters is that markets generate near-triggers constantly, and your brain is wired to accept them under the pressure of FOMO. A written trigger is a tripwire — either it fires or it does not.
Stop placement — technical level and max %R
Stops belong at a level where the setup itself is invalidated, not at a round percentage that feels comfortable. For a breakout, that is usually back inside the opening range, below the most recent swing low, or below the VWAP — whichever is structurally tightest. The same stop must also pass a portfolio test: if filled, the loss cannot exceed your defined R — an R multiple: profit divided by risk, so one R is the risk you planned to take — typically 0.25% to 1% of account equity. If the technical stop implies a position size too large for your R, you cut size, not the stop.
Profit target — resistance, measured move, or time-based exit
Targets need to be set before entry so the exit is mechanical, not emotional. Three useful framings: (1) the next clean horizontal resistance on the daily, (2) a measured move equal to the height of the consolidation, (3) a time-based exit if the trade has not moved 1R within N bars (for intraday breakouts, 15 minutes is reasonable). Scale-outs at each target preserve some R while letting a runner extend. What you do not do is hold past your final target hoping for more.
Max risk per trade — defining one R
R is the dollar amount you are willing to lose on a single trade if the stop hits. Every other number in the strategy scales off it. Common ranges: 0.25R for paper or B-grade ideas, 0.5R for A-grade, 1R for A++. If 1R is $500, then a $0.50 stop distance means a 1000-share position — the math runs in that direction, not the other way around. Sizing by share count first and discovering risk later is how accounts die.
Time-of-day filter and daily attempt cap
Most edges live in narrow windows. Opening-range breakouts work best between 9:30 and 10:30 ET; after that, the statistical edge decays sharply. Lunch (11:30–13:30) is where overtrading happens. Encode the window in the strategy. Cap daily attempts at two or three valid signals — if both fail, stop trading. The cap is not a punishment; it is recognition that conditions on a given day either favor the setup or they do not, and forcing a fourth attempt is gambling.
Key takeaways
- A strategy is a written contract — vague rules produce vague results.
- Setup criteria are observable facts. Triggers are single, recordable events.
- Stops belong at structural invalidation, sized so loss never exceeds 1R.
- Targets and scale-outs are defined before entry, not discovered during the trade.
- A daily attempt cap protects you from the version of yourself that wants to "make it back".