ETF Mean Reversion

Entry Logic

• Long Entry: An ETF is trading at a significant discount to its net asset value (NAV).
• Short Entry: An ETF is trading at a significant premium to its NAV.
• Confirmation: The premium/discount begins to narrow.
• Timeframe: Daily.
• Location: Extreme deviation from NAV.
• Market Condition: Any.

Exit Logic

• Profit Target: The ETF's price converges with its NAV.
• Scaling Out: No.
• Trailing Stop: No.
• Signal Failure: Exit if the premium/discount widens further.
• Opposite Signal: Not applicable.
• Time Expiration: Hold until convergence.
• Momentum Loss: Exit if the convergence stalls.

Stop Loss Structure

• Hard Stop: A pre-defined maximum premium/discount.
• Soft Stop: If the convergence does not start within a few days.
• Max Dollar Loss: Varies.
• Max Percent Loss: 3%.
• Structural Stop: Not applicable.

Risk Management Framework

• Risk Per Trade: 1.5%.
• Daily Limit: Not applicable.
• Weekly Limit: 5%.
• Max Drawdown: 15%.
• R:R Requirement: 3:1.

Position Sizing Model

• Sizing Approach: Based on the size of the premium/discount.
• Volatility Adjustment: No.
• Conviction Sizing: No.
• Scaling In: No.
• Scaling Out: No.

Trade Filtering

• Market Conditions: Most common in less liquid or more volatile ETFs.
• Setups: Requires access to real-time NAV data.
• Instruments: ETFs known for tracking errors (e.g., some commodity or international ETFs).
• Time Restrictions: None.
• Chop/News Avoidance: Yes.

Context Framework

• Trend Direction: Not applicable.
• VWAP Relationship: Not applicable.
• MA Relationship: Not applicable.
• Range Location: At an extreme of the premium/discount range.
• Higher TF Alignment: Not applicable.

Trade Management Rules

• Breakeven: No.
• Scale Out: No.
• Add Size: No.
• Fast vs Slow Moves: This is typically a slow-moving trade.

Time Rules

• Optimal Window: Any.
• Times to Avoid: Times of extreme market stress, when tracking errors can become very large.
• Session Notes: An arbitrage-like strategy.

Setup Classification

• A+ Setup: A large, historically significant premium/discount in a liquid ETF.
• A Setup: A moderate premium/discount.
• B Setup: A small premium/discount.
• C Setup: No significant premium/discount.

Market Selection Criteria

• Instruments: ETFs with a history of tracking errors.
• Volume: Moderate to high.
• Volatility: Any.

Statistical Edge Metrics

• Win Rate: 80-90%.
• Avg Win: 1R.
• Avg Loss: 1R.
• Profit Factor: 4.0.
• Expectancy: +0.6R.

Failure Conditions

• Market Conditions: A structural problem with the ETF that causes a permanent tracking error.
• Specific Scenarios: The ETF is forced to liquidate its assets.

Psychological Rules

• Discipline: This is a highly technical, data-driven strategy. Emotions have no place.

Advanced Components

• Regime Detection: Not applicable.
• Filters: Avoid ETFs with very low assets under management.
• Correlation: Not applicable.
• MTF Alignment: Not applicable.

Location

• Strongest: In ETFs that track less liquid underlying assets.
• Weakest: In highly liquid, well-managed ETFs like SPY.