Gap and Fade

Entry Logic

• Exact Entry Trigger: Fade the initial gap move after the first 15-30 minutes of trading. For a gap up, short below the 15-minute opening range low. For a gap down, buy above the 15-minute opening range high.
• Confirmation Requirements: The stock must fail to continue in the direction of the gap and show signs of reversal, such as a topping or bottoming tail on the 15-minute candle.
• Timeframe Required: 15-minute chart for setup, 5-minute for entry.
• Location Context: The gap should be into a key resistance (for gap ups) or support (for gap downs) level.
• Market Condition Requirement: A range-bound or indecisive market.

Exit Logic

• Profit Target(s): Target the 50% retracement of the gap, and then the full gap fill.
• Scaling Out Rules: Scale out at each target.
• Trailing Stop Rules: Use the 20-period EMA on the 5-minute chart as a trailing stop.
• Exit on Signal Failure: Exit if the stock breaks the high (for shorts) or low (for longs) of the opening 15-minute range.
• Exit on Opposite Signal: Not applicable.
• Exit on Time Expiration: Exit by the end of the day.
• Exit on Momentum Loss: Exit if the fade stalls.

Stop Loss Structure

• Hard Stop Location: Above the high of the day for shorts, below the low of the day for longs.
• Soft Stop Rules: None.
• Maximum Dollar Loss: Adhere to the 1% account risk rule.
• Maximum Percent Loss: Stop loss should not exceed 3% of the stock price.
• Structural Stop Placement: The high/low of the day.

Risk Management Framework

• Risk Per Trade: 0.5% to 1% of trading capital.
• Maximum Daily Loss Limit: 3%.
• Maximum Weekly Loss Limit: 6%.
• Maximum Drawdown Allowed: 15%.
• Risk-Reward Ratio Requirement: Minimum 2:1.

Position Sizing Model

• Recommended Sizing Approach: Based on 1% risk rule.
• Volatility-Based Adjustment: Reduce size in highly volatile stocks.
• Conviction-Based Sizing: Full size for A+ setups.
• Scaling In Rules: Do not scale in.
• Scaling Out Rules: As defined in Exit Logic.

Trade Filtering

• Market Conditions to Avoid: Strong trending markets.
• Specific Setups Required: Gap into a key level.
• Stock/Instrument Requirements: Liquid stocks.
• Time of Day Restrictions: After the first 30 minutes.
• Chop/News Avoidance Rules: Avoid news-driven gaps.

Context Framework

• Trend Direction Assessment: Best in range-bound markets.
• VWAP Relationship: Look for the price to cross VWAP against the gap direction.
• Moving Average Relationship: The price should be extended from its key moving averages.
• Range Location: At the edge of a range.
• Higher Timeframe Alignment: The higher timeframe should also be range-bound.

Trade Management Rules

• When to Move Stop to Breakeven: After the first target is hit.
• When to Scale Out: At profit targets.
• When to Add Size: Never.
• How to Handle Fast Moves vs Slow Moves: Let the trade play out.

Time Rules

• Optimal Trading Window: Mid-morning (10:00 AM - 12:00 PM EST).
• Times to Avoid: The opening 30 minutes.
• Session-Specific Notes: Works well in any session.

Setup Classification

• A+ Setup Criteria: Gap into a major S/R level with clear rejection.
• A Setup Criteria: Gap into a minor S/R level.
• B Setup Criteria: Gap with no clear S/R level.
• C Setup Criteria: Gap in a strong trending market.

Market Selection Criteria

• Instrument Requirements: Liquid stocks.
• Volume/Liquidity Requirements: >1M daily volume.
• Volatility Requirements: Moderate.

Statistical Edge Metrics

• Expected Win Rate: 55-60%.
• Average Win Size: 2.5R.
• Average Loss Size: 1R.
• Profit Factor: 1.6 to 2.0.
• Expectancy Per Trade: +0.7R to +0.9R.

Failure Conditions

• Market Conditions Where Strategy Fails: Strong trending markets.
• Specific Scenarios to Avoid: Fading a gap with a strong catalyst.

Psychological Rules

• Key Mental Discipline Requirements: Requires patience to wait for the setup to confirm.

Advanced Components

• Market Regime Detection: Use market internals to confirm a range-bound day.
• Volatility/Liquidity Filters: Avoid illiquid stocks.
• Correlation Filters: Not applicable.
• Multi-Timeframe Alignment: Look for divergence on a higher timeframe.

Location

• Where This Setup Is Strongest: At key S/R levels.
• Where This Setup Is Weakest: In the middle of a range.
• Location Changes Outcome: The strength of the S/R level is critical.