Moving Average Distance Mean Reversion

Entry Logic

• Long Entry: Price is at a historical maximum distance below the 50-period simple moving average (SMA).
• Short Entry: Price is at a historical maximum distance above the 50-period SMA.
• Confirmation: A momentum oscillator (like RSI or Stochastics) shows a divergence.
• Timeframe: 60-minute.
• Location: Extreme extension from the 50 SMA.
• Market Condition: Trending market that is overextended.

Exit Logic

• Profit Target: A return to the 50 SMA.
• Scaling Out: Not typical for this strategy.
• Trailing Stop: A tight bar-by-bar stop.
• Signal Failure: Exit if price extends even further from the 50 SMA.
• Opposite Signal: Not applicable.
• Time Expiration: Exit after 12-15 bars.
• Momentum Loss: Exit if price consolidates far from the 50 SMA.

Stop Loss Structure

• Hard Stop: 1 ATR (14) beyond the entry candle's high/low.
• Soft Stop: If price fails to start reverting within 3 candles.
• Max Dollar Loss: $1000.
• Max Percent Loss: 2%.
• Structural Stop: Beyond a major pivot.

Risk Management Framework

• Risk Per Trade: 1%.
• Daily Limit: 1 trade per day.
• Weekly Limit: 2% drawdown.
• Max Drawdown: 10%.
• R:R Requirement: 3:1.

Position Sizing Model

• Sizing Approach: Fixed fractional.
• Volatility Adjustment: Size is adjusted based on the distance to the stop loss.
• Conviction Sizing: Only A+ setups are taken.
• Scaling In: No.
• Scaling Out: No.

Trade Filtering

• Market Conditions: Only in established trends.
• Setups: Requires a historical precedent for the level of extension.
• Instruments: Major stock indices and blue-chip stocks.
• Time Restrictions: None.
• Chop/News Avoidance: Yes.

Context Framework

• Trend Direction: The trade is counter-trend to the immediate move, but in the direction of the longer-term mean.
• VWAP Relationship: Not a primary factor.
• MA Relationship: The core of the strategy is the extension from the 50 SMA.
• Range Location: At the extremes of a multi-day range.
• Higher TF Alignment: The daily chart should show the potential for a pullback.

Trade Management Rules

• Breakeven: After a 1R move.
• Scale Out: No.
• Add Size: No.
• Fast vs Slow Moves: This strategy seeks to capture the reversal of a fast, emotional move.

Time Rules

• Optimal Window: Any.
• Times to Avoid: Around major news.
• Session Notes: More effective on instruments that have a strong tendency to revert to their mean.

Setup Classification

• A+ Setup: Price reaches a 3-month high/low distance from the 50 SMA with divergence.
• A Setup: Price reaches a 1-month high/low distance from the 50 SMA.
• B Setup: Price is visually very extended but not at a historical level.
• C Setup: The market is in a low-volatility grind up/down.

Market Selection Criteria

• Instruments: SPX, NDX, AAPL, MSFT.
• Volume: High.
• Volatility: Moderate to high.

Statistical Edge Metrics

• Win Rate: 40-50%.
• Avg Win: 3R.
• Avg Loss: 1R.
• Profit Factor: 1.6.
• Expectancy: +0.4R.

Failure Conditions

• Market Conditions: A paradigm shift in the market that causes a permanent repricing.
• Specific Scenarios: A true trend day that never looks back.

Psychological Rules

• Discipline: This is a difficult trade to take emotionally. Requires strong conviction in the historical data.

Advanced Components

• Regime Detection: Use historical volatility to define what constitutes an extreme extension.
• Filters: Only trade in the direction of the 200-period moving average.
• Correlation: Not a primary factor.
• MTF Alignment: The daily and weekly charts should provide context for the potential pullback.

Location

• Strongest: After a climax run in a mature trend.
• Weakest: At the beginning of a new trend.