Gap Up Short Squeeze

Entry Logic

• Exact Entry Trigger: A heavily shorted stock gaps up, consolidates, and then breaks out above the opening range high. Enter long on the breakout.
• Confirmation Requirements: High volume on the breakout. The stock should be on the short sale restricted list.
• Timeframe Required: 5-minute chart.
• Location Context: The entry occurs after shorts are trapped.
• Market Condition Requirement: A market that is showing signs of strength.

Exit Logic

• Profit Target(s): Target 2R and 3R.
• 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 breaks below the opening range low.
• Exit on Opposite Signal: Not applicable.
• Exit on Time Expiration: Exit by the end of the day.
• Exit on Momentum Loss: Exit if the upward momentum stalls.

Stop Loss Structure

• Hard Stop Location: Below the opening range low.
• Soft Stop Rules: None.
• Maximum Dollar Loss: 1% of account.
• Maximum Percent Loss: 3% of stock price.
• Structural Stop Placement: Below the opening range low.

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 bear markets.
• Specific Setups Required: A gap up short squeeze.
• Stock/Instrument Requirements: Heavily shorted stocks.
• Time of Day Restrictions: First hour of trading.
• Chop/News Avoidance Rules: Avoid news-driven gaps.

Context Framework

• Trend Direction Assessment: Best in range-bound or bullish markets.
• VWAP Relationship: The entry should occur as the stock breaks above VWAP.
• Moving Average Relationship: The stock is often reclaiming its key moving averages.
• Range Location: At the top of the daily range.
• Higher Timeframe Alignment: A bullish 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: First hour of trading.
• Times to Avoid: Mid-day chop.
• Session-Specific Notes: Best in the New York session.

Setup Classification

• A+ Setup Criteria: A clear breakout with high volume.
• A Setup Criteria: A breakout with average volume.
• B Setup Criteria: A breakout with no clear pattern.
• C Setup Criteria: A breakout in a strong bear market.

Market Selection Criteria

• Instrument Requirements: Heavily shorted stocks.
• Volume/Liquidity Requirements: >5M daily volume.
• Volatility Requirements: High.

Statistical Edge Metrics

• Expected Win Rate: 40-45%.
• Average Win Size: 4R.
• Average Loss Size: 1R.
• Profit Factor: 1.6 to 2.0.
• Expectancy Per Trade: +0.8R to +1.2R.

Failure Conditions

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

Psychological Rules

• Key Mental Discipline Requirements: Requires discipline to buy a stock that is up significantly.

Advanced Components

• Market Regime Detection: Use market internals to confirm strength.
• 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: After a gap up.
• Where This Setup Is Weakest: In a trending market.
• Location Changes Outcome: The strength of the breakout is critical.