Gap and Fail Below VWAP

Entry Logic

• Exact Entry Trigger: A stock gaps down, rallies to VWAP, and fails to break above it for at least two 5-minute candles. Enter short on the break of the low of the consolidation range.
• Confirmation Requirements: Volume should decrease on the rally to VWAP and increase on the breakdown. The stock should show relative weakness.
• Timeframe Required: 5-minute chart.
• Location Context: The entry occurs at VWAP, a key intraday resistance level.
• Market Condition Requirement: A market that is showing signs of weakness.

Exit Logic

• Profit Target(s): Target the low of the day, then 2R.
• Scaling Out Rules: Scale out at each target.
• Trailing Stop Rules: Use the 20-period EMA on the 5-minute chart.
• Exit on Signal Failure: Exit if the stock fails to hold below VWAP.
• Exit on Opposite Signal: Not applicable.
• Exit on Time Expiration: Exit by the end of the day.
• Exit on Momentum Loss: Exit if the downward momentum stalls.

Stop Loss Structure

• Hard Stop Location: Above VWAP.
• Soft Stop Rules: None.
• Maximum Dollar Loss: 1% of account.
• Maximum Percent Loss: 3% of stock price.
• Structural Stop Placement: Above VWAP.

Risk Management Framework

• Risk Per Trade: 1% of capital.
• Maximum Daily Loss Limit: 3%.
• Maximum Weekly Loss Limit: 6%.
• Maximum Drawdown Allowed: 15%.
• Risk-Reward Ratio Requirement: Minimum 2:1.

Position Sizing Model

• Recommended Sizing Approach: Based on 1% risk rule.
• Volatility-Based Adjustment: Reduce size in volatile stocks.
• Conviction-Based Sizing: Full size for A+ setups.
• Scaling In Rules: Do not scale in.
• Scaling Out Rules: As defined in Exit Logic.

Trade Filtering

• Market Conditions to Avoid: Strong bull markets.
• Specific Setups Required: A gap down and fail below VWAP.
• Stock/Instrument Requirements: Liquid stocks.
• Time of Day Restrictions: Any time of day.
• Chop/News Avoidance Rules: Avoid news-driven gaps.

Context Framework

• Trend Direction Assessment: Best in range-bound or bearish markets.
• VWAP Relationship: The entry occurs at VWAP.
• Moving Average Relationship: The stock is often failing at its key moving averages.
• Range Location: In the middle of the daily range.
• Higher Timeframe Alignment: A bearish divergence on a higher timeframe adds conviction.

Trade Management Rules

• When to Move Stop to Breakeven: After the first target is hit.
• When to Scale Out: At profit targets.
• When to Add Size: Never.
• How to Handle Fast Moves vs Slow Moves: Let the trade play out.

Time Rules

• Optimal Trading Window: Any time of day.
• Times to Avoid: The opening 15 minutes.
• Session-Specific Notes: Works well in any session.

Setup Classification

• A+ Setup Criteria: A clear fail below VWAP with high volume breakdown.
• A Setup Criteria: A fail below VWAP with average volume.
• B Setup Criteria: A fail below VWAP with no clear breakdown.
• C Setup Criteria: A fail below VWAP in a strong bull market.

Market Selection Criteria

• Instrument Requirements: Liquid stocks.
• Volume/Liquidity Requirements: >1M daily volume.
• Volatility Requirements: Moderate.

Statistical Edge Metrics

• Expected Win Rate: 60-65%.
• Average Win Size: 2.5R.
• Average Loss Size: 1R.
• Profit Factor: 1.8 to 2.2.
• Expectancy Per Trade: +0.8R to +1.0R.

Failure Conditions

• Market Conditions Where Strategy Fails: Strong bull markets.
• Specific Scenarios to Avoid: Fails below VWAP that do not have a clear pattern.

Psychological Rules

• Key Mental Discipline Requirements: Requires patience to wait for the fail to confirm.

Advanced Components

• Market Regime Detection: Use market internals to confirm weakness.
• Volatility/Liquidity Filters: Avoid illiquid stocks.
• Correlation Filters: Not applicable.
• Multi-Timeframe Alignment: Look for confirmation on the 15-minute chart.

Location

• Where This Setup Is Strongest: At VWAP.
• Where This Setup Is Weakest: In the middle of a range.
• Location Changes Outcome: The strength of the fail is critical.