Momentum Factor Algorithm

Entry Logic

• Long entry triggers when a stock's 50-day return is in the top decile of the market and price breaks above the 20-day high.
• Short entry is not used in this strategy.
• Confirmation requires a 50% increase in average daily volume on the breakout day.
• Timeframe is daily chart for signal, 5-minute for entry.
• Location context is a breakout from a 4-week or longer consolidation base.
• Market condition must be a bull market, with the S&P 500 above its 200-day SMA.

Exit Logic

• Profit target is a 20% gain from the entry price.
• Scale out 50% of the position at a 10% gain.
• Trailing stop is a 10-day low after the initial profit target is reached.
• Exit on signal failure if the breakout fails and closes back inside the consolidation range.
• Exit on opposite signal is not applicable.
• Exit on time expiration after 3 months.
• Exit on momentum loss if the stock's 50-day return drops out of the top quintile.

Stop Loss Structure

• Hard stop is placed at the low of the breakout day candle.
• Soft stop is a close below the 20-day EMA.
• Maximum dollar loss is $200 per trade.
• Maximum percent loss is 2% of account equity.
• Structural stop is placed below the low of the consolidation base.

Risk Management Framework

• Risk per trade is 1% of account equity.
• Maximum daily loss limit is 3% of account equity.
• Maximum weekly loss limit is 6% of account equity.
• Maximum drawdown is 20%.
• Risk-reward ratio requirement is a minimum of 1:3.

Position Sizing Model

• Sizing is based on the Kelly Criterion, with a fractional Kelly of 0.5.
• Volatility adjustment uses a 20-day ATR to determine position size.
• Conviction sizing is based on the strength of the sector's relative performance.
• No scaling in.
• Scaling out is done at predefined profit targets.

Trade Filtering

• Avoid trading in bear markets or when the VIX is above 30.
• Only trade stocks with a market capitalization above $2 billion.
• Avoid stocks with high short interest.
• Time of day restrictions are not applicable for this daily chart strategy.
• Avoid holding positions through earnings announcements.

Context Framework

• Trend direction must be up on the weekly and daily charts.
• Price must be above the 50-day VWAP.
• The 20-day EMA must be above the 50-day EMA.
• Location is a breakout from a defined price pattern.
• Higher timeframe alignment requires the monthly chart to be in an uptrend.

Trade Management Rules

• Move stop to breakeven after a 5% gain.
• Scale out at 10% and 20% profit targets.
• Do not add to winning positions.
• Hold through fast moves; consider taking profits on slow, grinding moves.

Time Rules

• Optimal trading window is not applicable.
• Avoid entering new positions in December due to holiday seasonality.
• Session notes are not applicable.

Setup Classification

• A+ setup: Breakout from a long base in a top-performing sector with high volume.
• A setup: Breakout with high volume in a mid-tier sector.
• B setup: Breakout on average volume.
• C setup: Breakout with low volume or in a weak sector.

Market Selection Criteria

• Instruments are growth stocks with strong earnings.
• Minimum daily volume of 1 million shares.
• Volatility should be expanding from a low base.

Statistical Edge Metrics

• Expected win rate is 40%.
• Average win is 5R.
• Average loss is 1R.
• Profit factor is 2.0.
• Expectancy per trade is +0.6R.

Failure Conditions

• Strategy fails during market corrections and bear markets.
• A false breakout with a sharp reversal is a primary failure scenario.
• Avoid if the broad market is showing signs of weakness.

Psychological Rules

• Must have the patience to hold through pullbacks.
• Avoid chasing breakouts that have already extended far from the base.
• Cut losses quickly if the breakout fails.

Advanced Components

• Market regime detection uses the slope of the 200-day SMA on the S&P 500.
• Volatility filter requires the ATR to be expanding.
• Correlation filter avoids holding multiple stocks from the same industry group.
• Multi-timeframe alignment confirms the breakout on the weekly chart.

Location

• Strongest in the early stages of a new bull market.
• Weakest during market tops and bear markets.
• The success of the strategy is highly dependent on the overall market cycle.