Standard Deviation Mean Reversion

Entry Logic

• Long Entry: Price closes 2 standard deviations below the 20-period moving average.
• Short Entry: Price closes 2 standard deviations above the 20-period moving average.
• Confirmation: Next candle shows a failure to continue the move.
• Timeframe: 5-minute.
• Location: Extreme deviation from the short-term mean.
• Market Condition: Ranging or volatile.

Exit Logic

• Profit Target: The 20-period moving average.
• Scaling Out: Exit 50% at the 20 MA, trail the rest.
• Trailing Stop: Use a 1-bar high/low trail.
• Signal Failure: Exit if price closes further than 2.5 standard deviations from the mean.
• Opposite Signal: Not applicable.
• Time Expiration: Exit after 5 bars if the target is not hit.
• Momentum Loss: Exit if price stalls.

Stop Loss Structure

• Hard Stop: 2.5 standard deviations from the 20 MA.
• Soft Stop: A second consecutive close beyond the 2 standard deviation level.
• Max Dollar Loss: $750.
• Max Percent Loss: 1.5%.
• Structural Stop: Beyond a recent pivot.

Risk Management Framework

• Risk Per Trade: 1%.
• Daily Limit: 2 losses.
• Weekly Limit: 5%.
• Max Drawdown: 15%.
• R:R Requirement: 1.5:1.

Position Sizing Model

• Sizing Approach: Fixed fractional.
• Volatility Adjustment: The strategy is inherently volatility-adjusted.
• Conviction Sizing: Full size for all valid setups.
• Scaling In: No.
• Scaling Out: Yes.

Trade Filtering

• Market Conditions: Avoid low-volatility environments.
• Setups: Requires a sharp move to the 2 standard deviation level.
• Instruments: Volatile stocks and index futures.
• Time Restrictions: Best during the first 2 hours of the trading day.
• Chop/News Avoidance: Yes.

Context Framework

• Trend Direction: Neutral to counter-trend.
• VWAP Relationship: Fade moves that are significantly extended from VWAP.
• MA Relationship: Price is far from all key moving averages.
• Range Location: At the extremes of the intraday range.
• Higher TF Alignment: Not critical, but helpful if the higher timeframe is not strongly trending.

Trade Management Rules

• Breakeven: Move stop to breakeven when price crosses the 1 standard deviation level.
• Scale Out: At the 20 MA.
• Add Size: No.
• Fast vs Slow Moves: Designed for fast, v-shaped reversals.

Time Rules

• Optimal Window: First two hours of the US session.
• Times to Avoid: Lunchtime, pre-close.
• Session Notes: Requires volatility to be effective.

Setup Classification

• A+ Setup: Price hits 2.5-3 standard deviations and immediately reverses.
• A Setup: Price hits 2 standard deviations with a reversal candle.
• B Setup: Price hits 2 standard deviations and stalls.
• C Setup: Price slowly grinds along the 2 standard deviation line.

Market Selection Criteria

• Instruments: NQ, RTY, volatile tech stocks.
• Volume: High volume is required.
• Volatility: High ATR and beta.

Statistical Edge Metrics

• Win Rate: 70%.
• Avg Win: 1.2R.
• Avg Loss: 1R.
• Profit Factor: 2.1.
• Expectancy: +0.54R.

Failure Conditions

• Market Conditions: A strong, trending market that ignores standard deviation levels.
• Specific Scenarios: A "black swan" type event causing extreme, sustained moves.

Psychological Rules

• Discipline: Must be able to handle the discomfort of fading a strong move.

Advanced Components

• Regime Detection: Use VIX to gauge market fear and potential for extreme moves.
• Filters: Avoid trading if a major news catalyst is driving the move.
• Correlation: Be aware of sector-wide moves.
• MTF Alignment: Check if the higher timeframe is also at an extreme.

Location

• Strongest: In volatile, but ultimately range-bound markets.
• Weakest: In quiet, low-volatility markets or strong trends.