Pre-Market Relative Strength Scan

Entry Logic

• Entry trigger: Identify stocks that are significantly stronger or weaker than the overall market (SPY) in the pre-market.
• Confirmation: The stock breaks its pre-market high for a long, or its pre-market low for a short.
• Timeframe: 15-minute chart for analysis, 5-minute for entry.
• Location context: The stock is showing relative strength or weakness compared to the sector and the market.
• Market condition: A market with a clear directional bias.

Exit Logic

• Profit target: 2R, or the next key daily level.
• Scaling out: Not recommended.
• Trailing stop: Use the 9-period EMA on the 5-minute chart as a trailing stop.
• Signal failure exit: Exit if the stock loses its relative strength or weakness.
• Opposite signal exit: Not applicable.
• Time expiration: Exit the trade by 11:00 AM ET.
• Momentum loss: Exit if the stock stalls and starts to move sideways.

Stop Loss Structure

• Hard stop: Below the breakout point for longs, above for shorts.
• Soft stop: A close back below the breakout level.
• Max dollar loss: $400 per trade.
• Max percent loss: 0.8% 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: 0.4% of account equity.
• Maximum daily loss limit: 1.6% of account equity.
• Maximum weekly loss limit: 4% of account equity.
• Maximum drawdown: 12% from peak equity.
• Risk-reward ratio: Minimum 2.5:1 required.

Position Sizing Model

• Sizing approach: Fixed fractional sizing.
• Volatility adjustment: Not applicable.
• Conviction sizing: Not applicable.
• Scaling in: Not recommended.
• Scaling out: Not recommended.

Trade Filtering

• Market conditions to avoid: A market with no clear direction.
• Specific setups required: A stock that is clearly outperforming or underperforming the market.
• Stock/instrument requirements: High-beta stocks that are sensitive to market moves.
• Time of day restrictions: Trade only in the first hour of the market open.
• Chop/news avoidance: Avoid stocks with upcoming news that could change their correlation with the market.

Context Framework

• Trend direction: Trade in the direction of the relative strength or weakness.
• VWAP relationship: The stock should be above VWAP for longs, below for shorts.
• Moving average relationship: The 50-period SMA on the 15-minute chart should be trending in the direction of the trade.
• Range location: Not applicable.
• Higher TF alignment: The daily chart should support the direction of the trade.

Trade Management Rules

• Breakeven: Move stop to breakeven after a 1R move.
• Scale out: Not applicable.
• Add size: Not applicable.
• Fast vs slow moves: Let the trade work, but be prepared to take profits if the market reverses.

Time Rules

• Optimal window: 9:30 AM to 10:30 AM ET.
• Times to avoid: After 11:00 AM ET.
• Session notes: This strategy requires a good understanding of market internals.

Setup Classification

• A+ criteria: A stock with extreme relative strength or weakness in a strongly trending market.
• A criteria: A stock with clear relative strength or weakness in a trending market.
• B criteria: A stock with mild relative strength or weakness, or a choppy market.
• C criteria: Avoid all other setups.

Market Selection Criteria

• Instrument requirements: High-beta stocks.
• Volume/liquidity: Minimum 1M shares average daily volume.
• Volatility: High volatility is ideal.

Statistical Edge Metrics

• Win rate: 55%.
• Avg win: 2.5R.
• Avg loss: 1R.
• Profit factor: 1.37.
• Expectancy: 0.37R per trade.

Failure Conditions

• The strategy fails when the stock's correlation to the market suddenly changes.
• Avoid when the market is behaving erratically.

Psychological Rules

• Trust your analysis of relative strength and weakness.
• Do not fight the market.

Advanced Components

• Regime detection: Use the TICK index to gauge market sentiment.
• Filters: Filter for stocks in the strongest or weakest sectors.
• Correlation: This strategy is based on correlation.
• MTF alignment: The daily and weekly charts should confirm the direction of the trade.

Location

• Strongest: In trending markets with clear leadership.
• Weakest: In choppy, directionless markets.