Relative Strength Mean Reversion

Entry Logic

• Long Entry: A stock is showing significant relative weakness compared to the market (e.g., SPY) and the market is at a key support level.
• Short Entry: A stock is showing significant relative strength compared to the market and the market is at a key resistance level.
• Confirmation: The stock starts to revert to the market's performance.
• Timeframe: 5-minute.
• Location: Extreme relative performance at a key market level.
• Market Condition: Any.

Exit Logic

• Profit Target: The stock's performance converges with the market's performance.
• Scaling Out: No.
• Trailing Stop: A tight bar-by-bar stop.
• Signal Failure: Exit if the relative weakness/strength continues.
• Opposite Signal: Not applicable.
• Time Expiration: Exit within the hour.
• Momentum Loss: Exit if the reversion stalls.

Stop Loss Structure

• Hard Stop: A new relative high/low in the stock.
• Soft Stop: If the stock does not start to revert quickly.
• Max Dollar Loss: $350.
• Max Percent Loss: 0.7%.
• Structural Stop: The high/low of the day in the stock.

Risk Management Framework

• Risk Per Trade: 0.5%.
• Daily Limit: 3 trades.
• Weekly Limit: 3%.
• Max Drawdown: 10%.
• R:R Requirement: 2:1.

Position Sizing Model

• Sizing Approach: Fixed fractional.
• Volatility Adjustment: No.
• Conviction Sizing: No.
• Scaling In: No.
• Scaling Out: No.

Trade Filtering

• Market Conditions: Best when the market is at a clear inflection point.
• Setups: Look for a stock that is clearly out of sync with the market.
• Instruments: High-beta stocks vs. SPY.
• Time Restrictions: Any.
• Chop/News Avoidance: Be aware of stock-specific news.

Context Framework

• Trend Direction: Counter-trend to the stock's immediate move, but in line with the expected market move.
• VWAP Relationship: The stock is likely far from its VWAP.
• MA Relationship: The stock is likely extended from its MAs.
• Range Location: At an extreme of its daily range.
• Higher TF Alignment: Not critical.

Trade Management Rules

• Breakeven: After a 1R move.
• Scale Out: No.
• Add Size: No.
• Fast vs Slow Moves: This is a fast, tactical trade.

Time Rules

• Optimal Window: Any time the market is at a key level.
• Times to Avoid: When the market is chopping sideways.
• Session Notes: A relative value strategy.

Setup Classification

• A+ Setup: A high-beta stock making new lows while the SPY is testing a major support level.
• A Setup: A stock lagging the market's bounce.
• B Setup: A stock that is only slightly weaker/stronger than the market.
• C Setup: A stock that is moving in sync with the market.

Market Selection Criteria

• Instruments: High-beta stocks (e.g., tech, biotech) and SPY.
• Volume: High.
• Volatility: High.

Statistical Edge Metrics

• Win Rate: 55%.
• Avg Win: 2R.
• Avg Loss: 1R.
• Profit Factor: 1.65.
• Expectancy: +0.3R.

Failure Conditions

• Market Conditions: When the stock has a valid, stock-specific reason for its relative weakness/strength.
• Specific Scenarios: A bad earnings report, a product failure, etc.

Psychological Rules

• Discipline: Must be able to monitor both the stock and the market simultaneously.

Advanced Components

• Regime Detection: Not applicable.
• Filters: Use a relative strength indicator to quantify the divergence.
• Correlation: The strategy is based on the correlation between a stock and the market.
• MTF Alignment: Not applicable.

Location

• Strongest: At major market inflection points.
• Weakest: In quiet, trendless markets.