Spread Tightening Scalp

Entry Logic

• Exact entry trigger: The bid-ask spread, which was previously wide, suddenly tightens.
• Confirmation requirements: The Level 2 order book shows an increase in liquidity on both the bid and ask side.
• Timeframe required: 1-minute or tick chart.
• Location context: Near a key support or resistance level.
• Market condition requirement: Illiquid or volatile market that is transitioning to a more liquid state.

Exit Logic

• Profit target(s): 5-10 cents above the entry price.
• Scaling out rules: No scaling out.
• Trailing stop rules: No trailing stop.
• Exit on signal failure: If the price does not move in the intended direction within 1 minute, exit the trade.
• Exit on opposite signal: If the spread widens again, exit the trade.
• Exit on time expiration: Exit the trade after 3 minutes, regardless of the outcome.
• Exit on momentum loss: If the volume dries up, exit the trade.

Stop Loss Structure

• Hard stop location: 2 cents below the entry price.
• Soft stop rules: None.
• Maximum dollar loss per trade: $50.
• Maximum percent loss per trade: 0.5% of the account.
• Structural stop placement: Below the low of the entry candle.

Risk Management Framework

• Risk per trade: 0.25% of the account.
• Maximum daily loss limit: 3 consecutive losing trades.
• Maximum weekly loss limit: 5% of the account.
• Maximum drawdown allowed: 10% of the account.
• Risk-reward ratio requirement: 2:1.

Position Sizing Model

• Recommended sizing approach: Fixed share size.
• Volatility-based adjustment: N/A.
• Conviction-based sizing (A+/A/B setup): N/A.
• Scaling in rules: No scaling in.
• Scaling out rules: No scaling out.

Trade Filtering

• Market conditions to avoid: Liquid and stable markets.
• Specific setups required: A clear tightening of the bid-ask spread.
• Stock/instrument requirements: Stocks that are typically illiquid but are experiencing a surge in interest.
• Time of day restrictions: N/A.
• Chop/news avoidance rules: Avoid trading around major news events.

Context Framework

• Trend direction assessment: N/A.
• VWAP relationship: N/A.
• Moving average relationship: N/A.
• Range location: N/A.
• Higher timeframe alignment: N/A.

Trade Management Rules

• When to move stop to breakeven: After the price has moved 5 cents in your favor.
• When to scale out: No scaling out.
• When to add size: No adding size.
• How to handle fast moves vs slow moves: In fast moves, take profits quickly. In slow moves, be patient and let the trade work.

Time Rules

• Optimal trading window: N/A.
• Times to avoid: N/A.
• Session-specific notes: This strategy can be used at any time of the day.

Setup Classification

• A+ setup criteria: All entry criteria are met.
• A setup criteria: N/A.
• B setup criteria: N/A.
• C setup criteria: The spread does not tighten significantly.

Market Selection Criteria

• Instrument requirements: Stocks with a daily volume of over 1 million shares.
• Volume/liquidity requirements: The stock must have a wide bid-ask spread that is starting to tighten.
• Volatility requirements: The stock must have a daily range of at least $1.

Statistical Edge Metrics

• Expected win rate: 65%.
• Average win size: $0.10.
• Average loss size: $0.05.
• Profit factor: 1.3.
• Expectancy per trade: $0.01.

Failure Conditions

• Market conditions where strategy fails: Liquid and stable markets.
• Specific scenarios to avoid: Trading stocks with a consistently tight spread.

Psychological Rules

• Key mental discipline requirements: The ability to identify subtle changes in market dynamics.

Advanced Components

• Market regime detection: N/A.
• Volatility/liquidity filters: N/A.
• Correlation filters: N/A.
• Multi-timeframe alignment: N/A.

Location

• Where this setup is strongest: In illiquid stocks that are gaining attention.
• Where this setup is weakest: In highly liquid stocks.
• Location changes outcome: N/A.