Ch. 22Strategy #737

Strategy #737

RTY (Russell 2000) Small Cap Momentum

Entry Logic

  • Exact Entry Trigger: Enter long RTY on a breakout above a key resistance level with high volume. Enter short RTY on a breakdown below a key support level with high volume.
  • Confirmation: The breakout/breakdown must be accompanied by a surge in momentum, as indicated by the RSI (14) moving above 60 for longs or below 40 for shorts.
  • Timeframe: 5-minute chart.
  • Location Context: The setup should occur after a period of consolidation.
  • Market Condition: High volatility and a clear directional bias in small-cap stocks.

Exit Logic

  • Profit Targets: A measured move from the consolidation pattern.
  • Scaling Out: Not recommended.
  • Trailing Stop: Trail the stop loss below the 20-period EMA.
  • Signal Failure Exit: Exit if the breakout/breakdown fails and the price closes back inside the consolidation.
  • Opposite Signal Exit: Not applicable.
  • Time Expiration: Exit if the trade does not show a profit within 60 minutes.
  • Momentum Loss: Exit if the RSI starts to diverge from the price action.

Stop Loss Structure

  • Hard Stop: Place the stop loss below the low of the breakout candle for longs, or above the high for shorts.
  • Soft Stop: Not used.
  • Max Dollar Loss: $1,000 per contract.
  • Max Percent Loss: 1% of account capital.
  • Structural Stop: The stop is placed behind the breakout level.

Risk Management Framework

  • Risk Per Trade: 0.5% of account capital.
  • Maximum Daily Loss Limit: 2% of account capital.
  • Maximum Weekly Loss Limit: 5% of account capital.
  • Maximum Drawdown: 10% from peak equity.
  • R:R Requirement: Minimum 2:1 risk-reward ratio.

Position Sizing Model

  • Sizing Approach: Volatility-based position sizing.
  • Volatility Adjustment: Adjust position size based on the ATR.
  • Conviction Sizing: Not applicable.
  • Scaling In: Not recommended.
  • Scaling Out: Not recommended.

Trade Filtering

  • Market Conditions to Avoid: Low-volume, choppy markets.
  • Specific Setups Required: A clear consolidation pattern followed by a high-volume, high-momentum breakout.
  • Instruments: RTY (Russell 2000 E-mini futures).
  • Time Restrictions: Trade during the first two hours of the US session.
  • Chop/News Avoidance: Avoid trading around major news events.

Context Framework

  • Trend Direction: Trade in the direction of the prevailing trend.
  • VWAP Relationship: For longs, the price should be above VWAP. For shorts, the price should be below VWAP.
  • MA Relationship: The 20 EMA should be above the 50 EMA for longs, and below for shorts.
  • Range Location: Trade breakouts from consolidation patterns.
  • Higher TF Alignment: The higher timeframes should support the direction of the trade.

Trade Management Rules

  • Breakeven: Move stop to breakeven after the price has moved 1R in your favor.
  • Scale Out: Not applicable.
  • Add Size: Not recommended.
  • Fast vs Slow Moves: This strategy is designed for fast moves. If the move is slow, consider exiting the trade.

Time Rules

  • Optimal Trading Window: The first two hours of the US session.
  • Times to Avoid: The rest of the day.
  • Session Notes: This strategy is most effective during the US session due to the high volume and volatility in small-cap stocks.

Setup Classification

  • A+ Setup: A textbook consolidation pattern with a high-volume, high-momentum breakout and all context elements aligned.
  • A Setup: A good consolidation pattern with a decent breakout.
  • B Setup: A sloppy consolidation pattern or a weak breakout.
  • C Setup: Avoid. No clear pattern or breakout.

Market Selection Criteria

  • Instruments: RTY (Russell 2000 E-mini futures).
  • Volume/Liquidity: High volume and liquidity are crucial.
  • Volatility: High volatility is preferred.

Statistical Edge Metrics

  • Win Rate: 40-45%.
  • Avg Win: 3.5R.
  • Avg Loss: 1R.
  • Profit Factor: 1.4.
  • Expectancy: 0.4R per trade.

Failure Conditions

  • When Strategy Fails: In choppy, range-bound markets.
  • Specific Scenarios to Avoid: Trading breakouts that are not supported by volume and momentum.

Psychological Rules

  • Mental Discipline: Be prepared for sharp moves and have your orders ready. Do not hesitate.

Advanced Components

  • Regime Detection: Use a momentum filter to identify when the market is in a high-momentum state.
  • Filters: Use a volume filter to confirm breakouts.
  • Correlation: Check the correlation with other major indices.
  • MTF Alignment: Ensure the higher timeframes are aligned with the trade direction.

Location

  • Where Strongest: In high-momentum, trending markets.
  • Where Weakest: In low-volume, choppy markets.