Multi-Asset Correlation Trade

Entry Logic

• Long entry: Asset A (e.g., SPY) makes a new high, but correlated Asset B (e.g., QQQ) fails to confirm. Go long the stronger asset (A) and short the weaker asset (B).
• Short entry: Asset A makes a new low, but correlated Asset B fails to confirm. Go short the weaker asset (A) and long the stronger asset (B).
• Confirmation: A clear divergence in price action between the two assets.
• Timeframe: 5-minute chart.
• Location: At new session highs or lows.
• Market Condition: Trending or range-bound.

Exit Logic

• Profit Target: When the correlation converges, or a fixed 2R target on the combined position.
• Scaling Out: Not recommended.
• Trailing Stop: Not recommended.
• Signal Failure: Exit if the divergence widens significantly against the position.
• Opposite Signal: Not applicable.
• Time Expiration: Exit by the end of the day.
• Momentum Loss: Not applicable.

Stop Loss Structure

• Hard Stop: A fixed dollar amount loss on the combined position.
• Soft Stop: If the divergence continues to expand.
• Max Dollar Loss: $200 per trade (combined position).
• Max Percent Loss: 1% of account.
• Structural Stop: Not applicable.

Risk Management Framework

• Risk Per Trade: 1% of account on the combined position.
• Daily Limit: 2 losing trades.
• Weekly Limit: 5% drawdown.
• Max Drawdown: 10%.
• R:R Requirement: At least 2:1.

Position Sizing Model

• Sizing Approach: Dollar-neutral position. The dollar value of the long position should equal the dollar value of the short position.
• Volatility Adjustment: Not applicable.
• Conviction Sizing: Not recommended.
• Scaling In: Not recommended.
• Scaling Out: Not recommended.

Trade Filtering

• Market Conditions: Avoid times of low liquidity.
• Setups: Only trade clear divergences between highly correlated assets.
• Instruments: SPY/QQQ, GLD/SLV, or other highly correlated pairs.
• Time Restrictions: Any time.
• Chop/News Avoidance: Be cautious around news that might affect one asset more than the other.

Context Framework

• Trend Direction: Not applicable.
• VWAP Relationship: Not a primary component.
• MA Relationship: Not a primary component.
• Range Location: Not applicable.
• Higher TF Alignment: Not applicable.

Trade Management Rules

• Breakeven: Not applicable.
• Scale Out: Not applicable.
• Add Size: Not applicable.
• Fast vs Slow Moves: This is a convergence trade, so it may be slow.

Time Rules

• Optimal Window: Any time.
• Times to Avoid: Illiquid periods.
• Session Notes: This is a market-neutral strategy.

Setup Classification

• A+ Setup: A very clear and wide divergence between two highly correlated assets.
• A Setup: A good divergence.
• B Setup: A minor divergence.
• C Setup: No divergence.

Market Selection Criteria

• Instruments: Pairs of assets with a historical correlation of >0.8.
• Volume: High volume in both assets.
• Volatility: Moderate volatility.

Statistical Edge Metrics

• Win Rate: 70%.
• Avg Win: 1.5R.
• Avg Loss: 1R.
• Profit Factor: 2.33.
• Expectancy: 0.35R per trade.

Failure Conditions

• Market Conditions: Fails if the correlation between the two assets breaks down.
• Specific Scenarios: A news event affects one asset but not the other.

Psychological Rules

• Mental Discipline: Requires a good understanding of correlation and the ability to manage a two-sided position.

Advanced Components

• Regime Detection: Not applicable.
• Filters: Use a correlation matrix to find suitable pairs.
• Correlation: The entire strategy is based on correlation.
• MTF Alignment: Not applicable.

Location

• Strongest: When correlation is temporarily broken.
• Weakest: When correlation is holding strong.