Trend Exhaustion Candle Reversal

Entry Logic

• Enter short after a large bullish candle on high volume that fails to hold its gains and closes near the open.
• Confirmation is a shooting star or doji candle on the daily chart.
• Use a daily timeframe for this setup.
• Entry should be below the low of the exhaustion candle.
• This setup works best in a mature uptrend.

Exit Logic

• The profit target is the 38.2% Fibonacci retracement of the prior uptrend.
• Scale out 50% at the 23.6% Fibonacci level.
• Trail the remaining position with the 10-day EMA.
• Exit if price closes above the high of the exhaustion candle.
• Exit on a confirmed bullish reversal pattern.
• Exit if the trade is not profitable within 15 days.
• Exit if the MACD shows a bullish crossover.

Stop Loss Structure

• Place a hard stop above the high of the exhaustion candle.
• A soft stop is a close above the 10-day EMA.
• Maximum dollar loss is $1800 per trade.
• Maximum percent loss is 3.6% of the account.
• The structural stop is the high of the exhaustion candle.

Risk Management Framework

• Risk 2.2% of the account per trade.
• Daily loss limit is 6.6% of the account.
• Weekly loss limit is 13% of the account.
• Maximum drawdown is 38%.
• Minimum risk-reward ratio is 2:1.

Position Sizing Model

• Use a reduced position size for this high-risk setup.
• Adjust size based on the range of the exhaustion candle.
• No conviction sizing is used.
• Do not scale into trades.
• Scale out at predefined Fibonacci levels.

Trade Filtering

• Avoid trading this setup on low-volume stocks.
• Requires a clear exhaustion candle with high volume.
• Trade only stocks that are in a mature uptrend.
• Avoid trading this setup during a bull market mania.
• Do not trade in choppy, sideways markets.

Context Framework

• The weekly chart should show an extended uptrend.
• Price should be far above the 50-week SMA.
• The setup should occur at a new all-time high.
• The monthly chart should show overbought conditions.

Trade Management Rules

• Do not move the stop to breakeven until the first profit target is hit.
• Scale out at the 23.6% and 38.2% Fibonacci levels.
• Do not add to winning trades.
• Be patient, as the reversal can take time to unfold.

Time Rules

• This setup is identified at the end of the trading day.
• The entry is taken on the following day.
• The trade can last for several weeks.

Setup Classification

• A+ setup: Large exhaustion candle, massive volume, extreme overbought conditions.
• A setup: Clear exhaustion candle, high volume, overbought conditions.
• B setup: Small exhaustion candle, average volume, some overbought signs.
• C setup: No clear exhaustion, avoid.

Market Selection Criteria

• Trade large-cap growth stocks that have had a huge run-up.
• Minimum daily volume of 4 million shares.
• The stock should be a household name.

Statistical Edge Metrics

• Expected win rate is 50%.
• Average win is 4R.
• Average loss is 1R.
• Profit factor is 2.0.
• Expectancy per trade is 1.0R.

Failure Conditions

• The strategy fails if the exhaustion candle is just a pause before another move higher.
• A common failure is a failed reversal that gets bought up quickly.

Psychological Rules

• Have the discipline to short a popular stock.
• Do not get shaken out by the initial volatility.

Advanced Components

• Use options market data to see if there is heavy call selling.
• A news sentiment analysis tool can help gauge the mood of the market.
• Avoid trading this setup on multiple stocks in the same sector.
• The monthly chart should show a potential long-term top.

Location

• The setup is strongest at a new all-time high after a parabolic run.
• The setup is weakest in a sideways market.
• The location of the exhaustion candle in the overall trend is critical.