Pre-Market Reversal Setup

Entry Logic

• Entry trigger: Stock forms a double top or double bottom pattern in the pre-market.
• Confirmation: A break of the neckline of the pattern on the 15-minute chart.
• Timeframe: 15-minute for pattern identification, 5-minute for entry.
• Location context: The reversal occurs at a key daily support or resistance level.
• Market condition: A trending pre-market session that is showing signs of exhaustion.

Exit Logic

• Profit target: The measured move of the reversal pattern.
• Scaling out: Not recommended.
• Trailing stop: A manual trail bar-by-bar on the 15-minute chart.
• Signal failure exit: Exit if the neckline is retested and holds as support/resistance.
• Opposite signal exit: Not applicable.
• Time expiration: Exit if the target is not reached by the market open.
• Momentum loss: Exit if the reversal stalls and volume dries up.

Stop Loss Structure

• Hard stop: Above the high of the double top for shorts, below the low of the double bottom for longs.
• Soft stop: A close back above/below the neckline.
• Max dollar loss: $350 per trade.
• Max percent loss: 0.7% of account capital.
• Structural stop: At the invalidation point of the reversal pattern.

Risk Management Framework

• Risk per trade: 0.35% of account equity.
• Maximum daily loss limit: 1.4% of account equity.
• Maximum weekly loss limit: 3.5% of account equity.
• Maximum drawdown: 11% from peak equity.
• Risk-reward ratio: Minimum 2.5:1 required.

Position Sizing Model

• Sizing approach: Risk-based position sizing.
• Volatility adjustment: Not applicable.
• Conviction sizing: Not applicable.
• Scaling in: Not recommended.
• Scaling out: Not recommended.

Trade Filtering

• Market conditions to avoid: Strongly trending markets with no signs of reversal.
• Specific setups required: A clear, well-defined reversal pattern.
• Stock/instrument requirements: Stocks that are approaching a major daily level.
• Time of day restrictions: 8:00 AM to 9:15 AM ET.
• Chop/news avoidance: Avoid if the reversal is not supported by a shift in the broader market sentiment.

Context Framework

• Trend direction: Trade against the prevailing pre-market trend.
• VWAP relationship: The reversal should cause the price to cross VWAP.
• Moving average relationship: The 9-period and 20-period EMAs on the 15-minute chart should cross, signaling a trend change.
• Range location: The reversal often occurs at the extremes of the pre-market range.
• Higher TF alignment: The reversal should be in the direction of the daily chart trend.

Trade Management Rules

• Breakeven: Move stop to breakeven after a 1R move.
• Scale out: Not applicable.
• Add size: Not applicable.
• Fast vs slow moves: Be patient and let the reversal play out.

Time Rules

• Optimal window: 8:30 AM to 9:00 AM ET.
• Times to avoid: The first 30 minutes of pre-market trading.
• Session notes: This strategy requires a good understanding of chart patterns.

Setup Classification

• A+ criteria: A perfect double top/bottom at a key daily level with divergence on the RSI.
• A criteria: A clear reversal pattern at a key level.
• B criteria: A less-defined pattern or a level that is not as significant.
• C criteria: Avoid all other setups.

Market Selection Criteria

• Instrument requirements: Any stock with good pre-market liquidity.
• Volume/liquidity: Minimum 50k shares traded by 8:30 AM ET.
• Volatility: Moderate to high volatility.

Statistical Edge Metrics

• Win rate: 50%.
• Avg win: 3R.
• Avg loss: 1R.
• Profit factor: 1.5.
• Expectancy: 0.5R per trade.

Failure Conditions

• The strategy fails when the reversal pattern is a fake-out and the trend resumes.
• Avoid in extremely strong, one-directional markets.

Psychological Rules

• It can be psychologically difficult to trade against the trend.
• Have confidence in your analysis and the reversal pattern.

Advanced Components

• Regime detection: Not applicable.
• Filters: Look for divergence on an oscillator like the RSI or MACD to confirm the reversal.
• Correlation: Not applicable.
• MTF alignment: The reversal should be confirmed by a similar pattern on the 60-minute chart.

Location

• Strongest: At key daily or weekly support/resistance levels.
• Weakest: In the middle of a range, with no clear levels nearby.