VIX Spike Reversal

Entry Logic

• Enter long the stock market when the VIX spikes to an extreme level (e.g., above 40) and starts to reverse.
• Confirmation is a bullish candlestick pattern on the daily chart of the market index.
• Use a daily timeframe for this setup.
• Entry should be above the high of the confirmation candle.
• This setup works best at the end of a sharp market decline.

Exit Logic

• The profit target is a 15% gain in the market index.
• Scale out 50% at a 10% gain.
• Trail the remaining position with the 20-day EMA.
• Exit if the VIX makes a new high.
• Exit on a confirmed bearish reversal pattern.
• Exit if the trade is not profitable within 2 months.
• Exit if the MACD shows a bearish crossover.

Stop Loss Structure

• Place a hard stop below the low of the market decline.
• A soft stop is a close below the 20-day EMA.
• Maximum dollar loss is $5000 per trade.
• Maximum percent loss is 10% of the account.
• The structural stop is below the low of the confirmation candle.

Risk Management Framework

• Risk 5% of the account per trade.
• Daily loss limit is not applicable for this timeframe.
• Weekly loss limit is 20% of the account.
• Maximum drawdown is 60%.
• Minimum risk-reward ratio is 2:1.

Position Sizing Model

• Use a fixed position size for this strategy.
• Do not adjust size based on volatility.
• No conviction sizing is used.
• Do not scale into trades.
• Scale out at the 10% gain level.

Trade Filtering

• Avoid trading this setup in a bear market.
• Requires an extreme spike in the VIX.
• Trade only the major market indices.
• Avoid trading this setup during times of low volatility.
• Do not trade in markets with no clear trend.

Context Framework

• The weekly chart should show a potential bottoming pattern.
• The market should be in a state of extreme panic.
• The setup should occur after a period of intense selling.
• The monthly chart should show a potential long-term bottom.

Trade Management Rules

• Do not move the stop to breakeven until the first profit target is hit.
• Scale out 50% at a 10% gain.
• Do not add to winning trades.
• This is a medium-term, contrarian trade.

Time Rules

• This setup can be identified at any time.
• The entry is taken on the day after the confirmation.
• The trade can last for several months.

Setup Classification

• A+ setup: Extreme VIX spike (above 50), strong confirmation candle, capitulation volume.
• A setup: High VIX spike (above 40), moderate confirmation candle, high volume.
• B setup: Elevated VIX (above 30), no clear confirmation, average volume.
• C setup: No extreme VIX reading, avoid.

Market Selection Criteria

• Trade major market index ETFs (SPY, QQQ).
• The market should have a history of reversing from extreme VIX levels.
• The market should have a high level of liquidity.

Statistical Edge Metrics

• Expected win rate is 90%.
• Average win is 3R.
• Average loss is 1R.
• Profit factor is 2.7.
• Expectancy per trade is 1.7R.

Failure Conditions

• The strategy fails if the VIX continues to rise after the entry.
• A common failure is a false reversal followed by a continuation of the downtrend.

Psychological Rules

• Have the courage to buy when everyone else is panicking.
• Do not get caught up in the fear.

Advanced Components

• Use the VIX term structure to gauge the level of fear.
• A news analysis can help understand the reason for the panic.
• Avoid trading this setup with leveraged ETFs.
• The weekly chart must confirm the potential bottom.

Location

• The setup is strongest at the end of a major market crash.
• The setup is weakest in a slow, grinding downtrend.
• The level of panic in the market is key to the success of the trade.