Mean Reversion from 2 ATR Extension

Entry Logic

• Enter short when a stock reaches 2 ATR above the 20-period SMA and shows signs of reversal.
• Confirmation is a bearish candlestick pattern on the 30-minute chart.
• Use a 30-minute timeframe for this setup.
• Entry should be below the low of the confirmation candle.
• This setup works best in a ranging or moderately trending market.

Exit Logic

• The profit target is the 20-period SMA.
• Take full profits at the target.
• No trailing stop is used.
• Exit if price moves 1 ATR above the entry price.
• Exit on a confirmed bullish reversal pattern.
• Exit if the trade is not profitable within 2 days.
• Exit if the MACD shows a bullish crossover.

Stop Loss Structure

• Place a hard stop 1 ATR above the entry price.
• No soft stop is used.
• Maximum dollar loss is $700 per trade.
• Maximum percent loss is 1.4% of the account.
• The structural stop is above the high of the confirmation candle.

Risk Management Framework

• Risk 1% of the account per trade.
• Daily loss limit is 3% of the account.
• Weekly loss limit is 7% of the account.
• Maximum drawdown is 20%.
• Minimum risk-reward ratio is 1.5:1.

Position Sizing Model

• Use a volatility-adjusted position sizing model.
• Adjust size based on the ATR.
• Use 1.5x size for A+ setups.
• Do not scale into trades.
• Do not scale out.

Trade Filtering

• Avoid trading this setup in a strong uptrend.
• Requires a clear extension of 2 ATR from the 20-period SMA.
• Trade only instruments that have a tendency to mean revert.
• Avoid trading this setup during major news releases.
• Do not trade in low-volume, choppy markets.

Context Framework

• The daily chart should show a ranging or moderately trending market.
• Price should be trading around the 200-day SMA.
• The setup should occur at a resistance level.
• The weekly chart should show a neutral bias.

Trade Management Rules

• Do not move the stop to breakeven.
• Take full profits at the target.
• Do not add to winning trades.
• This is a short-term mean reversion trade.

Time Rules

• The optimal time to trade this setup is during the main session of the instrument.
• Avoid trading this setup in the last hour of the day.
• The trade should last for a few days at most.

Setup Classification

• A+ setup: Extension of 3+ ATR, strong confirmation candle, high volume.
• A setup: Extension of 2 ATR, moderate confirmation candle, average volume.
• B setup: Extension of less than 2 ATR, no clear confirmation, low volume.
• C setup: No clear setup, avoid.

Market Selection Criteria

• Trade stock indices, forex pairs, and commodities.
• The instrument should have a high level of liquidity.
• The instrument should have a stable ATR.

Statistical Edge Metrics

• Expected win rate is 75%.
• Average win is 1.5R.
• Average loss is 1R.
• Profit factor is 1.125.
• Expectancy per trade is 0.125R.

Failure Conditions

• The strategy fails if the stock continues to trend after the entry.
• A common failure is a brief pullback followed by a continuation of the uptrend.

Psychological Rules

• Have the discipline to short a strong move.
• Do not get greedy and try to get more out of the trade.

Advanced Components

• Use a standard deviation channel to confirm the extension.
• A market internals indicator can help gauge the strength of the reversal.
• Avoid trading this setup on correlated instruments.
• The 4-hour chart must confirm the reversal.

Location

• The setup is strongest when it forms at a major resistance level.
• The setup is weakest in a strong, one-directional trend.
• The location of the extension in the overall price structure is important.