Capitulation Volume Reversal

Entry Logic

• Enter long after a massive volume spike on a sharp down move, followed by a strong reversal candle.
• Confirmation is a bullish engulfing or hammer candle on the daily chart.
• Use a daily timeframe for this setup.
• Entry should be above the high of the reversal candle.
• This setup works best at the end of a prolonged downtrend.

Exit Logic

• The profit target is the 50% retracement of the prior downtrend.
• Scale out 33% at 1R, 33% at 2R, and the rest at the 50% retracement.
• Trail the remaining position with the 20-day EMA.
• Exit if price closes below the low of the capitulation candle.
• Exit on a confirmed bearish reversal pattern.
• Exit if the trade is not profitable within 20 days.
• Exit if the MACD shows a bearish crossover.

Stop Loss Structure

• Place a hard stop below the low of the capitulation candle.
• No soft stop is used for this strategy.
• Maximum dollar loss is $2000 per trade.
• Maximum percent loss is 4% of the account.
• The structural stop is the absolute low of the move.

Risk Management Framework

• Risk 2.5% of the account per trade.
• Daily loss limit is 7.5% of the account.
• Weekly loss limit is 15% of the account.
• Maximum drawdown is 40%.
• Minimum risk-reward ratio is 3:1.

Position Sizing Model

• Use a reduced position size for this high-risk setup.
• Adjust size based on the volatility of the capitulation move.
• No conviction sizing is used.
• Do not scale into trades.
• Scale out at predefined profit targets.

Trade Filtering

• Avoid trading this setup on illiquid stocks.
• Requires a multi-month downtrend with accelerating volume.
• Trade only highly liquid stocks and ETFs.
• Avoid trading this setup in the first hour of the day.
• Do not trade in markets with no clear trend.

Context Framework

• The weekly chart should show an extended downtrend.
• Price should be far below the 200-week SMA.
• The setup should occur at a new multi-year low.
• The monthly chart should show a parabolic decline.

Trade Management Rules

• Do not move the stop to breakeven until the first profit target is hit.
• Scale out at 1R, 2R, and the 50% retracement.
• Do not add to winning trades.
• Be prepared for extreme volatility after the capitulation.

Time Rules

• This setup can occur at any time of the day.
• Avoid holding this trade over the weekend if possible.
• The reversal can take several weeks to play out.

Setup Classification

• A+ setup: Massive volume spike (10x average), clear reversal candle, extreme oversold conditions.
• A setup: High volume spike (5x average), reversal candle, oversold conditions.
• B setup: Moderate volume spike (2x average), some reversal signs.
• C setup: No clear capitulation, avoid.

Market Selection Criteria

• Trade beaten-down stocks that have been in the news for negative reasons.
• Minimum daily volume of 5 million shares.
• The stock should be down at least 50% in the last 6 months.

Statistical Edge Metrics

• Expected win rate is 45%.
• Average win is 6R.
• Average loss is 1R.
• Profit factor is 2.7.
• Expectancy per trade is 1.7R.

Failure Conditions

• The strategy fails if the capitulation is just a pause before another move lower.
• A common failure is a failed reversal that gets sold into quickly.

Psychological Rules

• This is a difficult, counter-trend trade. It requires strong discipline and conviction.
• Do not be afraid to buy a stock that everyone hates.

Advanced Components

• Use on-chain analysis for crypto to spot whale buying.
• A news catalyst filter can help identify the reason for the capitulation.
• Avoid trading this setup on multiple correlated assets.
• The monthly chart should show extreme overselling.

Location

• The setup is strongest at a new multi-year low after a parabolic decline.
• The setup is weakest in a choppy, sideways market.
• The location of the capitulation determines the potential upside.