Earnings Gap Fade

Entry Logic

• Entry trigger: Stock gaps down over 4% on high volume (2x relative volume) following a negative earnings report.
• Confirmation: Price fails to break below the pre-market low and bounces.
• Timeframe: 5-minute and 15-minute charts for entry.
• Location context: Entry must occur below the declining 9-period and 20-period exponential moving averages (EMAs).
• Market condition: Weak trending day for the overall market (e.g., SPY trading below its 20 EMA).

Exit Logic

• Profit targets: First target at the pre-market low. Second target at the 50% retracement of the gap down.
• Scaling out: Sell 50% at the first target, and 50% at the second target.
• Trailing stop: Use the 20 EMA on the 15-minute chart as a trailing stop.
• Signal failure exit: Exit if the stock closes above the pre-market high.
• Opposite signal exit: Not applicable for this strategy.
• Time expiration: Exit the trade if it has not reached its target by the end of the day.
• Momentum loss: Exit if volume dries up and the stock starts to consolidate.

Stop Loss Structure

• Hard stop: Place a stop loss 1 ATR above the high of the entry candle.
• Soft stop: Not applicable.
• Max dollar loss: Do not risk more than $100 per trade.
• Max percent loss: Do not risk more than 1% of the account on a single trade.
• Structural stop: Place the stop loss above a key resistance level, such as the pre-market high.

Risk Management Framework

• Risk per trade: 0.5% of the account.
• Daily limit: Stop trading after three consecutive losses.
• Weekly limit: Stop trading for the week if down 5%.
• Max drawdown: 15%.
• R:R requirement: Minimum 2:1 risk/reward ratio.

Position Sizing Model

• Sizing approach: Fixed fractional position sizing.
• Volatility adjustment: Reduce position size on high volatility days.
• Conviction sizing: A+ setups get full size, A setups get half size, B setups get quarter size.
• Scaling in/out: Scale in on rallies to the 9 EMA. Scale out at pre-defined targets.

Trade Filtering

• Market conditions: Avoid trading on choppy or range-bound days.
• Setups: Only trade A+ or A setups.
• Instruments: Only trade stocks with a market capitalization over $10 billion.
• Time restrictions: Only trade during the first two hours of the market open.
• Chop/news avoidance: Avoid trading stocks with a history of rallying after gapping down.

Context Framework

• Trend direction: The stock must be in a long-term downtrend.
• VWAP relationship: The stock must be trading below VWAP.
• MA relationship: The stock must be trading below its 50-day and 200-day moving averages.
• Range location: The stock must be breaking down from a recent consolidation range.
• Higher TF alignment: The daily and weekly charts must show a clear downtrend.

Trade Management Rules

• Breakeven: Move the stop loss to breakeven after the first target is hit.
• Scale out: As defined in the exit logic.
• Add size: Not applicable.
• Fast vs slow moves: Let the winners run on fast moves. Take profits quicker on slow moves.

Time Rules

• Optimal window: 9:30 AM - 11:30 AM ET.
• Times to avoid: Avoid trading during the lunch hour (12:00 PM - 1:00 PM ET).
• Session notes: The morning session is the most volatile and offers the best opportunities.

Setup Classification

• A+ criteria: Perfect setup with all conditions met.
• A criteria: Most conditions are met, but not all.
• B criteria: Some conditions are met, but the setup is not ideal.
• C criteria: Avoid trading.

Market Selection Criteria

• Instruments: High-volume stocks with a history of gapping down on news.
• Volume: Minimum 1 million shares traded per day.
• Volatility: ATR greater than 1% of the stock price.

Statistical Edge Metrics

• Win rate: 55%.
• Avg win: 2.5R.
• Avg loss: 1R.
• Profit factor: 1.375.
• Expectancy: 0.375R per trade.

Failure Conditions

• Strategy fails when the overall market is in an uptrend.
• Avoid trading if the stock has a high institutional ownership, as this can lead to a squeeze.

Psychological Rules

• Stick to the plan and do not deviate from the rules.
• Do not get caught in a short squeeze.

Advanced Components

• Regime detection: Use a market regime filter to identify the current market trend.
• Filters: Use a volume filter to only trade stocks with high relative volume.
• Correlation: Avoid trading stocks that are highly correlated with each other.
• MTF alignment: Ensure that the higher timeframes are aligned with the entry timeframe.

Location

• Strongest: In a strong bear market.
• Weakest: In a bull market or a choppy market.