Sector Rotation Momentum

Entry Logic

• Exact Entry Trigger: Enter long on a 5-minute candle close above the prior day's high for the top-performing sector ETF of the past 5 trading days.
• Confirmation: Trading volume must be 1.5x the 20-period moving average of volume on the 5-minute chart.
• Timeframe: 5-minute chart for entry, daily chart for sector strength analysis.
• Location Context: Entry must occur above the 8-period and 21-period exponential moving averages (EMAs) on the 5-minute chart.
• Market Condition: The broader market, represented by SPY, must be in a confirmed uptrend (trading above its 50-day simple moving average).

Exit Logic

• Profit Targets: First profit target at a 1.5:1 risk-reward ratio. Second target at 3:1.
• Scaling Out: Exit 50% of the position at the first target. Trail the remaining position.
• Trailing Stop: Use a 10-period EMA on the 5-minute chart as a trailing stop for the second half of the position.
• Signal Failure Exit: Exit immediately if the ETF closes below the entry day's low.
• Opposite Signal Exit: Not applicable for this momentum strategy.
• Time Expiration: Exit the position if it has not reached its first target by the end of the trading session.
• Momentum Loss: Exit if the 5-minute RSI crosses below 50.

Stop Loss Structure

• Hard Stop: Place a hard stop 1 ATR (14-period) below the low of the entry candle on the 5-minute chart.
• Soft Stop: A close below the 21-period EMA on the 5-minute chart.
• Max Dollar Loss: Pre-defined based on account size, not to exceed 1% of total equity.
• Max Percent Loss: 2% of the position's value.
• Structural Stop: Below the most recent swing low on the 15-minute chart.

Risk Management Framework

• Risk Per Trade: 0.5% of the trading account.
• Maximum Daily Loss Limit: 1.5% of the account.
• Maximum Weekly Loss Limit: 3% of the account.
• Maximum Drawdown: 10% from peak equity.
• R:R Requirement: Minimum 1.5:1 on the first target.

Position Sizing Model

• Sizing Approach: Fixed fractional sizing based on account risk.
• Volatility Adjustment: Position size is adjusted based on the 14-period ATR. Size = (Account Risk) / (ATR * 1.5).
• Conviction Sizing: A+ setups (strong sector trend, high volume) receive 0.75% risk. B setups receive 0.5%.
• Scaling In: Not recommended for this strategy.
• Scaling Out: As defined in Exit Logic.*

Trade Filtering

• Market Conditions to Avoid: Avoid during major news events or when the VIX is above 30.
• Specific Setups Required: Only trade the top-performing sector from the past week.
• Instruments: Major sector ETFs (XLK, XLE, XLF, etc.).
• Time Restrictions: Only take entries within the first two hours of the trading day.
• Chop/News Avoidance: Do not trade within 15 minutes of major economic data releases.

Context Framework

• Trend Direction: The selected sector ETF must be in a clear uptrend on the daily chart.
• VWAP Relationship: Entries are only taken when the price is above the daily VWAP.
• Moving Average Relationship: Price must be above the 50-day and 200-day SMAs on the daily chart.
• Range Location: Entry should occur as a breakout from a consolidation range.
• Higher TF Alignment: The weekly chart of the sector must also show a bullish trend.

Trade Management Rules

• Breakeven: Move stop to breakeven once the trade reaches a 1:1 risk-reward ratio.
• Scale Out: At pre-defined profit targets.
• Add Size: Not applicable.
• Fast vs Slow Moves: In fast-moving markets, use a 5-period EMA as the trailing stop.

Time Rules

• Optimal Trading Window: 9:30 AM - 11:30 AM EST.
• Times to Avoid: Mid-day chop (12:00 PM - 2:00 PM EST) and the last hour of trading.
• Session Notes: Strategy performs best in the first half of the US session.

Setup Classification

• A+ Setup: Strong trend on daily and weekly, high volume breakout, broad market confirmation.
• A Setup: Strong trend on daily, moderate volume, broad market confirmation.
• B Setup: Weaker trend or lower volume.
• C Setup: No clear trend or conflicting signals.

Market Selection Criteria

• Instruments: Highly liquid sector ETFs with tight spreads.
• Volume/Liquidity: Minimum 1 million shares traded daily on average.
• Volatility: ATR should be at least 0.5% of the ETF's price.

Statistical Edge Metrics

• Expected Win Rate: 45-50%.
• Average Win Size: 2.5x the average loss.
• Average Loss Size: 1x the defined risk.
• Profit Factor: 1.8 - 2.2.
• Expectancy Per Trade: Positive, aiming for > 0.4R per trade.

Failure Conditions

• Market Conditions: Fails in choppy, range-bound markets or during sudden market reversals.
• Specific Scenarios: A strong sector suddenly reverses due to a news catalyst.

Psychological Rules

• Key Mental Discipline: Must have the discipline to wait for the setup and not chase price. Avoid FOMO.

Advanced Components

• Market Regime Detection: Use a 200-day SMA on the SPY to determine the overall market regime.
• Volatility/Liquidity Filters: As defined in Market Selection Criteria.
• Correlation Filters: Avoid trading a sector that is highly correlated with a sector you already have a position in.
• MTF Alignment: Daily and weekly trends must be aligned.

Location

• Where Strongest: In strongly trending markets with clear sector leadership.
• Where Weakest: In directionless, choppy markets.