Pairs Scalp (Long/Short)

Entry Logic

• Exact entry trigger: The spread between two highly correlated stocks deviates from its historical mean.
• Confirmation requirements: The deviation is statistically significant (e.g., 2 standard deviations).
• Timeframe required: 5-minute chart.
• Location context: N/A.
• Market condition requirement: A market where correlations are holding.

Exit Logic

• Profit target(s): The spread reverts to its historical mean.
• Scaling out rules: No scaling out.
• Trailing stop rules: No trailing stop.
• Exit on signal failure: If the spread continues to diverge, exit the trade.
• Exit on opposite signal: N/A.
• Exit on time expiration: Exit the trade after 60 minutes, regardless of the outcome.
• Exit on momentum loss: N/A.

Stop Loss Structure

• Hard stop location: A pre-defined loss based on a further deviation of the spread.
• Soft stop rules: None.
• Maximum dollar loss per trade: $100.
• Maximum percent loss per trade: 1% of the account.
• Structural stop placement: N/A.

Risk Management Framework

• Risk per trade: 0.5% of the account.
• Maximum daily loss limit: 2 consecutive losing trades.
• Maximum weekly loss limit: 3% of the account.
• Maximum drawdown allowed: 5% of the account.
• Risk-reward ratio requirement: N/A.

Position Sizing Model

• Recommended sizing approach: Dollar-neutral (i.e., long and short positions have equal dollar value).
• 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: A market where correlations are breaking down.
• Specific setups required: A clear statistical deviation in the spread between two correlated stocks.
• Stock/instrument requirements: Two highly correlated stocks (e.g., Coke and Pepsi).
• Time of day restrictions: N/A.
• Chop/news avoidance rules: Avoid trading around major news events that could affect one stock more than the other.

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: N/A.
• When to scale out: N/A.
• When to add size: N/A.
• How to handle fast moves vs slow moves: This is a mean-reversion strategy that requires patience.

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 deviation is not statistically significant.

Market Selection Criteria

• Instrument requirements: Two highly correlated stocks.
• Volume/liquidity requirements: The stocks must be highly liquid to ensure immediate execution.
• Volatility requirements: N/A.

Statistical Edge Metrics

• Expected win rate: 70%.
• Average win size: $0.20.
• Average loss size: $0.10.
• Profit factor: 1.4.
• Expectancy per trade: $0.08.

Failure Conditions

• Market conditions where strategy fails: A market where correlations are breaking down.
• Specific scenarios to avoid: Trading pairs that have a low historical correlation.

Psychological Rules

• Key mental discipline requirements: The ability to remain patient and trust the statistical edge.

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 markets where historical correlations are holding.
• Where this setup is weakest: In markets where correlations are breaking down.
• Location changes outcome: N/A.