Bollinger Band Walk Reversal

Entry Logic

• Enter short when a stock that has been walking up the upper Bollinger Band closes back inside the bands.
• Confirmation is a bearish candlestick pattern on the 1-hour chart.
• Use a 1-hour timeframe for this setup.
• Entry should be below the low of the confirmation candle.
• This setup works best in a strong uptrend that is showing signs of exhaustion.

Exit Logic

• The profit target is the middle Bollinger Band (20-period SMA).
• Take full profits at the target.
• No trailing stop is used.
• Exit if price closes back above the upper Bollinger Band.
• Exit on a confirmed bullish Bollinger Band walk.
• Exit if the trade is not profitable within 3 days.
• Exit if the MACD shows a bullish crossover.

Stop Loss Structure

• Place a hard stop above the high of the Bollinger Band walk.
• No soft stop is used.
• Maximum dollar loss is $900 per trade.
• Maximum percent loss is 1.8% of the account.
• The structural stop is above the high of the confirmation candle.

Risk Management Framework

• Risk 1.2% of the account per trade.
• Daily loss limit is 3.6% of the account.
• Weekly loss limit is 8% of the account.
• Maximum drawdown is 22%.
• Minimum risk-reward ratio is 1.5:1.

Position Sizing Model

• Use a fixed fractional sizing model.
• No volatility adjustment is needed.
• Use 1.5x size for A+ setups.
• Do not scale into trades.
• Do not scale out.

Trade Filtering

• Avoid trading this setup in a weak uptrend.
• Requires a clear Bollinger Band walk with at least 5 consecutive closes outside the bands.
• Trade only stocks that are in a strong uptrend.
• Avoid trading this setup during a bear market.
• Do not trade in choppy, sideways markets.

Context Framework

• The daily chart should show a strong uptrend.
• Price should be extended from the 50-day SMA.
• The setup should occur after a parabolic move.
• The weekly chart should show overbought conditions.

Trade Management Rules

• Do not move the stop to breakeven.
• Take full profits at the target.
• Do not add to winning trades.
• This is a short-term mean reversion trade.

Time Rules

• The optimal time to trade this setup is at the end of the day.
• The trade can last for a few days.

Setup Classification

• A+ setup: Long Bollinger Band walk (10+ closes), strong confirmation candle, high volume.
• A setup: Clear Bollinger Band walk (5+ closes), moderate confirmation candle, average volume.
• B setup: Short Bollinger Band walk, no clear confirmation, low volume.
• C setup: No clear setup, avoid.

Market Selection Criteria

• Trade momentum stocks and ETFs.
• The instrument should have a history of making strong trends.
• The instrument should have a high level of liquidity.

Statistical Edge Metrics

• Expected win rate is 80%.
• Average win is 1.5R.
• Average loss is 1R.
• Profit factor is 1.2.
• Expectancy per trade is 0.2R.

Failure Conditions

• The strategy fails if the stock continues to walk the band after the entry.
• A common failure is a brief pullback followed by a continuation of the uptrend.

Psychological Rules

• Have the discipline to short a strong stock.
• Do not get greedy and try to get more out of the trade.

Advanced Components

• Use a momentum indicator to confirm the exhaustion.
• A sentiment indicator can help gauge market euphoria.
• Avoid trading this setup on multiple correlated stocks.
• The daily chart must confirm the overbought conditions.

Location

• The setup is strongest when it forms after a parabolic move.
• The setup is weakest in a slow, grinding uptrend.
• The location of the Bollinger Band walk in the overall trend is important.