Gap into Support Bounce

Entry Logic

• Exact Entry Trigger: A stock gaps down directly into a significant daily support level and shows immediate signs of buying interest (e.g., a bullish hammer or engulfing candle on the 5-minute chart). Enter long on the break of the high of that candle.
• Confirmation Requirements: High volume on the reversal candle. The overall market should not be excessively weak.
• Timeframe Required: 5-minute chart for entry, daily chart for support levels.
• Location Context: The entry must be at or very near a pre-defined, significant support level.
• Market Condition Requirement: Ranging or bullish market conditions are ideal.

Exit Logic

• Profit Target(s): First target is the daily VWAP. Second target is the 50% gap fill. Final target is the full gap fill.
• Scaling Out Rules: Sell 40% at VWAP, 40% at the 50% gap fill, and 20% at the full gap fill.
• Trailing Stop Rules: Use the low of the previous 5-minute candle as a trailing stop after the first target is hit.
• Exit on Signal Failure: Exit immediately if the stock breaks and holds below the support level.
• Exit on Opposite Signal: Not applicable.
• Exit on Time Expiration: Close the position if it has not reached its first target within 90 minutes.
• Exit on Momentum Loss: Exit if the stock starts consolidating and fails to move higher for 30 minutes.

Stop Loss Structure

• Hard Stop Location: Place a hard stop 1 ATR (5-minute) below the low of the reversal candle.
• Soft Stop Rules: None. Use a hard stop only.
• Maximum Dollar Loss: Adhere to the 1% account risk rule.
• Maximum Percent Loss: The stop loss should not exceed 2.5% of the stock's price.
• Structural Stop Placement: The stop is placed below the structural support and the low of the day.

Risk Management Framework

• Risk Per Trade: Maximum 1% of trading capital.
• Maximum Daily Loss Limit: 3% of trading capital.
• Maximum Weekly Loss Limit: 6% of trading capital.
• Maximum Drawdown Allowed: 15% from peak equity.
• Risk-Reward Ratio Requirement: Minimum 2:1 to the first target (VWAP).

Position Sizing Model

• Recommended Sizing Approach: Calculate position size based on the stop loss distance and the 1% account risk rule.
• Volatility-Based Adjustment: Reduce size by 30% if the stock's daily ATR is above 5%.
• Conviction-Based Sizing: Use full size for A+ setups (major daily support), half size for A setups (minor support).
• Scaling In Rules: Do not scale into the position.
• Scaling Out Rules: As defined in the Exit Logic section.

Trade Filtering

• Market Conditions to Avoid: Avoid on days with overwhelmingly strong market-wide selling pressure.
• Specific Setups Required: A clean gap down into a well-defined daily support level.
• Stock/Instrument Requirements: Stocks that respect technical levels well. Avoid highly speculative or news-driven stocks.
• Time of Day Restrictions: Primarily in the first 60 minutes of the market open.
• Chop/News Avoidance Rules: Avoid if the gap is due to a major negative news catalyst that could override the support.

Context Framework

• Trend Direction Assessment: The stock's daily chart should ideally be in an uptrend or range-bound.
• VWAP Relationship: The entry occurs below VWAP, with the expectation that price will revert to it.
• Moving Average Relationship: The gap often takes the price far below the key short-term moving averages (9, 20 EMA).
• Range Location: The entry is at the bottom of the daily or weekly trading range.
• Higher Timeframe Alignment: The weekly and monthly charts should confirm the significance of the support level.

Trade Management Rules

• When to Move Stop to Breakeven: After the first profit target (VWAP) is hit.
• When to Scale Out: As defined in the Exit Logic section.
• When to Add Size: Never add to a bouncing position.
• How to Handle Fast Moves vs Slow Moves: For fast moves, use a wider trailing stop like the 20 EMA. For slow grinds up, the low of the previous candle works well.

Time Rules

• Optimal Trading Window: First 60 minutes of the US market open.
• Times to Avoid: After the first 90 minutes, as the setup becomes less reliable.
• Session-Specific Notes: This strategy is most effective during the New York session.

Setup Classification

• A+ Setup Criteria: Gap into a multi-year or all-time low support with immediate, high-volume buying.
• A Setup Criteria: Gap into a significant daily support level with a clear reversal candle.
• B Setup Criteria: Gap into a minor support level (e.g., a 60-minute chart level).
• C Setup Criteria: Gapping into support in a very strong bear market.

Market Selection Criteria

• Instrument Requirements: ETFs (like SPY, QQQ) and large-cap stocks.
• Volume/Liquidity Requirements: Minimum 5 million shares traded daily.
• Volatility Requirements: Moderate ATR, avoiding extremely low-float, high-volatility stocks.

Statistical Edge Metrics

• Expected Win Rate: 60-65%.
• Average Win Size: 2.5R.
• Average Loss Size: 1R.
• Profit Factor: 1.8 to 2.5.
• Expectancy Per Trade: +0.9R to +1.2R.

Failure Conditions

• Market Conditions Where Strategy Fails: Extremely strong bear markets where support levels are ignored.
• Specific Scenarios to Avoid: Buying a stock with a powerful negative catalyst (e.g., accounting fraud, CEO departure).

Psychological Rules

• Key Mental Discipline Requirements: Must have the conviction to buy a stock that is gapping down strongly. Trust the support level.

Advanced Components

• Market Regime Detection: Use VIX to assess market fear; a capitulation spike in VIX can support the bounce.
• Volatility/Liquidity Filters: Ensure the bid-ask spread is not excessively wide at the open.
• Correlation Filters: If the entire sector is gapping down strongly, be cautious about buying one stock.
• Multi-Timeframe Alignment: Confirmation of support on weekly and monthly charts adds significant weight to the setup.

Location

• Where This Setup Is Strongest: At multi-year, all-time, or significant daily chart support levels.
• Where This Setup Is Weakest: At minor intraday support levels that are likely to break.
• Location Changes Outcome: The quality of the support level is the single most important factor for this strategy.