Pre-Market News Reaction

Entry Logic

• Entry trigger: A stock reacts to a significant news catalyst (e.g., earnings, FDA approval, merger) in the pre-market.
• Confirmation: Price breaks and holds above a key resistance level for a long, or below a key support level for a short, on high volume.
• Timeframe: 5-minute chart.
• Location context: The entry should be near the price level where the news was released.
• Market condition: High volatility and a clear directional bias caused by the news.

Exit Logic

• Profit target: 2R, or the next major daily level.
• Scaling out: Scale out 50% at 1R, and trail the rest.
• Trailing stop: Use the 20-period EMA on the 5-minute chart as a trailing stop.
• Signal failure exit: Exit if the stock fails to follow through on the initial news reaction and reverses.
• Opposite signal exit: Not applicable.
• Time expiration: Exit the trade if it is not profitable within the first hour of the market open.
• Momentum loss: Exit if volume dries up and the stock begins to consolidate.

Stop Loss Structure

• Hard stop: Below the low of the candle that broke the key level for longs, above the high for shorts.
• Soft stop: A close back below the breakout level.
• Max dollar loss: $600 per trade.
• Max percent loss: 1.2% of account capital.
• Structural stop: Below the most recent swing low for longs, above the most recent swing high for shorts.

Risk Management Framework

• Risk per trade: 0.6% of account equity.
• Maximum daily loss limit: 2.4% of account equity.
• Maximum weekly loss limit: 6% of account equity.
• Maximum drawdown: 18% from peak equity.
• Risk-reward ratio: Minimum 2:1 required.

Position Sizing Model

• Sizing approach: Fixed fractional sizing.
• Volatility adjustment: Reduce size if the stock is extremely volatile after the news.
• Conviction sizing: Not applicable.
• Scaling in: Not recommended.
• Scaling out: At 1R and 2R profit targets.

Trade Filtering

• Market conditions to avoid: When the news is ambiguous or has already been priced in.
• Specific setups required: A clear, positive or negative news catalyst.
• Stock/instrument requirements: Stocks that are highly sensitive to news.
• Time of day restrictions: Trade only in the first 30 minutes after the news is released.
• Chop/news avoidance: Be aware of the potential for the stock to be halted.

Context Framework

• Trend direction: Trade in the direction of the news-driven momentum.
• VWAP relationship: The price should be decisively above or below VWAP.
• Moving average relationship: Not applicable.
• Range location: The news should cause the stock to break out of its pre-market range.
• Higher TF alignment: Not critical, as news can override technicals.

Trade Management Rules

• Breakeven: Move stop to breakeven after a 1R move.
• Scale out: At profit targets.
• Add size: Not recommended.
• Fast vs slow moves: Expect fast moves and be ready to take profits quickly.

Time Rules

• Optimal window: Immediately after the news is released.
• Times to avoid: Trading before the news is fully digested by the market.
• Session notes: This strategy requires a fast news feed and the ability to react quickly.

Setup Classification

• A+ criteria: A major, unexpected news catalyst with a very strong price reaction.
• A criteria: A significant news catalyst with a clear price reaction.
• B criteria: Minor news or an ambiguous price reaction.
• C criteria: Avoid all other setups.

Market Selection Criteria

• Instrument requirements: Stocks in the news.
• Volume/liquidity: High volume is essential.
• Volatility: High volatility is expected.

Statistical Edge Metrics

• Win rate: 50%.
• Avg win: 3.5R.
• Avg loss: 1R.
• Profit factor: 1.75.
• Expectancy: 0.75R per trade.

Failure Conditions

• The strategy fails when the initial reaction to the news is a fake-out.
• Avoid when the news is not as significant as it initially seems.

Psychological Rules

• Do not get caught up in the hype; trade the price action, not the news story.
• Be prepared for extreme volatility and potential losses.

Advanced Components

• Regime detection: Not applicable.
• Filters: Filter for news from reliable sources.
• Correlation: Not applicable.
• MTF alignment: Not applicable.

Location

• Strongest: In stocks with a history of strong reactions to news.
• Weakest: In stocks that are not widely followed.