External Structure Trade

Entry Logic

• Entry trigger: Price breaks out of a major, multi-day or multi-week consolidation or range (external structure).
• Confirmation: A daily candle closes decisively outside the range, with volume at least 100% above the 20-day average.
• Timeframe: Daily chart for structure, 1-hour for entry.
• Location context: The breakout should occur after a significant period of contraction in volatility.
• Market condition: Transitioning from a long-term balance to a new long-term imbalance (trend).

Exit Logic

• Profit target: Measured move of the range height, projected from the breakout point.
• Scaling out: Scale out 25% at 2R, 25% at 4R, and let the rest run.
• Trailing stop: Use the daily 20-period EMA as a trailing stop.
• Signal failure exit: Exit if a daily candle closes back inside the range.
• Opposite signal exit: Not applicable for this long-term trade.
• Time expiration: Hold for weeks or months, as long as the trend is intact.
• Momentum loss: Exit if the daily chart shows significant momentum divergence.

Stop Loss Structure

• Hard stop: Below the midpoint of the breakout day's candle, or 2 ATR from the entry.
• Soft stop: A daily close back inside the range.
• Max dollar loss: $500 per trade.
• Max percent loss: 2% of account.
• Structural stop: Below the low of the breakout candle on the daily chart.

Risk Management Framework

• Risk per trade: 1.5% of account.
• Daily limit: Not applicable (long-term trade).
• Weekly limit: Not applicable.
• Max drawdown: 20% (portfolio level).
• R:R requirement: Minimum 3:1 on the initial target.

Position Sizing Model

• Sizing approach: Core position sizing based on portfolio allocation.
• Volatility adjustment: Use the daily ATR to calculate position size for a fixed risk amount.
• Conviction sizing: This is a high-conviction trade; allocate a significant portion of the portfolio's risk budget.
• Scaling in: Add to the position on subsequent pullbacks to the daily 20 EMA.
• Scaling out: At pre-defined R-multiple targets.

Trade Filtering

• Market conditions to avoid: None; this setup defines a new market condition.
• Setups required: A well-defined, long-term range with clear boundaries.
• Instruments: Stocks, commodities, and cryptocurrencies known for long-term trends.
• Time restrictions: Not applicable.
• Chop/news avoidance: Be aware of major economic shifts that could drive the breakout.

Context Framework

• Trend direction: A new, major trend is beginning.
• VWAP relationship: Not relevant for this timeframe.
• MA relationship: The breakout should coincide with the major daily MAs (20, 50, 200) aligning in the direction of the trend.
• Range location: Breaking out from a multi-week/month balance area.
• Higher TF alignment: The weekly chart should confirm the breakout and show room to run.

Trade Management Rules

• Breakeven: Move stop to breakeven after the price has moved the height of the range in profit.
• Scale out: At 2R and 4R.
• Add size: On pullbacks to the daily 20 EMA.
• Fast vs slow moves: Be prepared to hold through both fast and slow periods as the new trend develops.

Time Rules

• Optimal window: Not applicable.
• Times to avoid: Not applicable.
• Session notes: The breakout may occur on a specific catalyst, like an earnings report or policy change.

Setup Classification

• A+ criteria: A breakout from a >3-month range on massive volume, with a fundamental catalyst.
• A criteria: A clean breakout from a multi-week range on high volume.
• B criteria: The breakout is not decisive, or volume is only average.
• C criteria: The range is not well-defined, or the breakout is on low volume.

Market Selection Criteria

• Instruments: XLE (Energy), BTC-USD, individual stocks after long-term base formation.
• Volume: Must have a significant volume spike on the breakout day.
• Volatility: Should be expanding from a low base.

Statistical Edge Metrics

• Win rate: 35%.
• Avg win: 10R+.
• Avg loss: 1R.
• Profit factor: 3.5+.
• Expectancy: High, due to the large size of winning trades.

Failure Conditions

• The breakout is a false breakout (bull/bear trap) and price reverts inside the range.
• The breakout lacks follow-through and the market enters a new, wider range.

Psychological Rules

• Requires extreme patience to wait for the setup and hold the position.
• Must have the conviction to take a large position and hold it for a long time.

Advanced Components

• Regime detection: Use volatility models (e.g., GARCH) to detect the shift from contraction to expansion.
• Filters: Use fundamental analysis to confirm the long-term thesis behind the breakout.
• Correlation: The breakout should ideally be part of a sector-wide or market-wide move.
• MTF alignment: The weekly and monthly charts must be aligned with the breakout direction.

Location

• Strongest: After a prolonged period of market indecision and low volatility.
• Weakest: In a market that is already trending strongly (less likely to find long-term ranges).