Sector Rotation with Momentum Filter

Entry Logic

• Long entry: Identify the strongest sector in the market over the past month. Within that sector, buy the stock with the highest relative strength and momentum.
• Short entry: Not applicable (long-only strategy).
• Confirmation: The sector and stock are both outperforming the S&P 500.
• Timeframe: Daily chart for selection, 1-hour chart for entry.
• Location: Any.
• Market Condition: A market with clear sector leadership.

Exit Logic

• Profit Target: Hold as long as the stock and sector remain leaders.
• Scaling Out: Not recommended.
• Trailing Stop: A trailing stop below the 50-day moving average.
• Signal Failure: If the stock or sector loses its leadership position.
• Opposite Signal: Not applicable.
• Time Expiration: Re-evaluate monthly.
• Momentum Loss: If the stock's relative strength starts to decline.

Stop Loss Structure

• Hard Stop: An 8% stop loss.
• Soft Stop: If the sector is no longer outperforming the market.
• Max Dollar Loss: $800 per trade.
• Max Percent Loss: 4% of account.
• Structural Stop: Below a major swing low.

Risk Management Framework

• Risk Per Trade: 4% of account.
• Daily Limit: Not applicable.
• Weekly Limit: Not applicable.
• Max Drawdown: 20%.
• R:R Requirement: Not applicable (trend-following).

Position Sizing Model

• Sizing Approach: Equal weight per position.
• Volatility Adjustment: Not a primary concern.
• Conviction Sizing: Not recommended.
• Scaling In: Not recommended.
• Scaling Out: Not recommended.

Trade Filtering

• Market Conditions: A market with clear sector trends.
• Setups: The stock must be a leader in the leading sector.
• Instruments: Sector ETFs (XLK, XLF, etc.) and their top holdings.
• Time Restrictions: Not applicable.
• Chop/News Avoidance: Not a concern.

Context Framework

• Trend Direction: The core of the strategy is to be in the strongest trends.
• VWAP Relationship: Not applicable.
• MA Relationship: Use the 50-day and 200-day moving averages to confirm the trend.
• Range Location: Not applicable.
• Higher TF Alignment: The weekly chart should confirm the leadership.

Trade Management Rules

• Breakeven: Not applicable.
• Scale Out: Not recommended.
• Add Size: Not recommended.
• Fast vs Slow Moves: This is a long-term, slow-moving strategy.

Time Rules

• Optimal Window: Not applicable.
• Times to Avoid: Not applicable.
• Session Notes: A portfolio management strategy.

Setup Classification

• A+ Setup: The leading stock in the leading sector in a bull market.
• A Setup: A leading stock in a leading sector.
• B Setup: A stock in a leading sector that is not a leader itself.
• C Setup: A stock in a lagging sector.

Market Selection Criteria

• Instruments: The most liquid stocks in the top-performing sectors.
• Volume: High.
• Volatility: Any.

Statistical Edge Metrics

• Win Rate: 50%.
• Avg Win: Large (can be multiples of the initial risk).
• Avg Loss: 1R (where R is the initial 8% stop).
• Profit Factor: High (can be > 3.0).
• Expectancy: High.

Failure Conditions

• Market Conditions: A choppy, sideways market with no clear sector leadership.
• Specific Scenarios: A sudden rotation out of the leading sector.

Psychological Rules

• Mental Discipline: Requires the patience to hold onto winners for a long time and the discipline to cut losers.

Advanced Components

• Regime Detection: The strategy itself is a form of regime detection.
• Filters: Use a relative strength scanner to find the best stocks.
• Correlation: Be aware of correlations within the sector.
• MTF Alignment: Weekly and monthly charts are important.

Location

• Strongest: In a trending bull market.
• Weakest: In a bear market or a choppy, sideways market.