Momentum Divergence Warning

Entry Logic

• Entry trigger: Price makes a new high, but a momentum indicator (like RSI or MACD) makes a lower high (bearish divergence).
• Confirmation: A bearish reversal candle forms.
• Timeframe: 15-minute chart.
• Location context: The divergence occurs at a key resistance level.
• Market condition: The market is overbought and due for a pullback.

Exit Logic

• Profit targets: 1R and 2R.
• Scaling out: Sell 50% at 1R.
• Trailing stop: Use the 20-period EMA as a trailing stop.
• Signal failure exit: Exit if the price makes a new high.
• Opposite signal exit: Not applicable.
• Time expiration: Exit by the end of the day.
• Momentum loss: Not applicable.

Stop Loss Structure

• Hard stop: Above the high of the reversal candle.
• Soft stop: A close above the key resistance level.
• Max dollar loss: 0.5% of account equity.
• Max percent loss: 1% of the trade's value.
• Structural stop: Above the high of the price swing.

Risk Management Framework

• Risk per trade: 0.25% of account equity.
• Daily limit: 4 losing trades.
• Weekly limit: 15 losing trades.
• Max drawdown: 3% of account equity.
• R:R requirement: 1.5:1.

Position Sizing Model

• Sizing approach: Fixed risk per trade.
• Volatility adjustment: Not applicable.
• Conviction sizing: Not applicable.
• Scaling in/out: Scale out at profit targets.

Trade Filtering

• Market conditions: Avoid strongly trending markets.
• Setups: Only trade clear divergences.
• Instruments: Any liquid stock.
• Time restrictions: Not applicable.
• Chop/news avoidance: Not applicable.

Context Framework

• Trend direction: The 1-hour chart should show signs of a potential reversal.
• VWAP relationship: Price should be extended far above VWAP.
• MA relationship: Price should be far from its moving averages.
• Range location: The divergence should occur at the top of a range.
• Higher TF alignment: The daily chart should be overbought.

Trade Management Rules

• Breakeven: Move stop to breakeven after 1R.
• Scale out: At profit targets.
• Add size: Do not add size.
• Fast vs slow moves: This is a counter-trend strategy, so expect fast moves.

Time Rules

• Optimal window: Not applicable.
• Times to avoid: Not applicable.
• Session notes: Can occur at any time.

Setup Classification

• A+ criteria: A clear, multi-swing divergence.
• A criteria: A single, clear divergence.
• B criteria: A subtle divergence.
• C criteria: Avoid.

Market Selection Criteria

• Instruments: Any liquid stock.
• Volume: Not a primary consideration.
• Volatility: Not a primary consideration.

Statistical Edge Metrics

• Win rate: 65%
• Avg win: 1.5R
• Avg loss: 1R
• Profit factor: 1.975
• Expectancy: 0.625R per trade

Failure Conditions

• When strategy fails: Fails in strongly trending markets where divergences can persist for a long time.

Psychological Rules

• Mental discipline: It can be difficult to trade against the trend.

Advanced Components

• Regime detection: Not applicable.
• Filters: Not applicable.
• Correlation: Not applicable.
• MTF alignment: Check the 1-hour and daily charts for confirmation.

Location

• Where strongest: At the top of a trading range or at the end of a long uptrend.
• Where weakest: In a strong, trending market.