Extended Hours Mean Reversion

Entry Logic

• Entry trigger: A stock becomes overextended from its after-hours VWAP, typically by 2% or more.
• Confirmation: A reversal candlestick pattern on the 15-minute chart, such as a doji or a hammer.
• Timeframe: 15-minute chart.
• Location context: The stock is extended and showing signs of exhaustion.
• Market condition: A volatile extended hours session.

Exit Logic

• Profit target: The after-hours VWAP.
• Scaling out: Not recommended.
• Trailing stop: A manual trail bar-by-bar on the 15-minute chart.
• Signal failure exit: Exit if the stock continues to move away from the VWAP.
• Opposite signal exit: Not applicable.
• Time expiration: Exit by the end of the extended hours session.
• Momentum loss: Not applicable.

Stop Loss Structure

• Hard stop: 1% beyond the entry point.
• Soft stop: A close beyond the high/low of the reversal candle.
• Max dollar loss: $900 per trade.
• Max percent loss: 1.8% of account capital.
• Structural stop: Above the high of the session for shorts, below the low for longs.

Risk Management Framework

• Risk per trade: 0.9% of account equity.
• Maximum daily loss limit: 3.6% of account equity.
• Maximum weekly loss limit: 9% of account equity.
• Maximum drawdown: 22% from peak equity.
• Risk-reward ratio: Minimum 1.5:1 required.

Position Sizing Model

• Sizing approach: Fixed fractional sizing.
• Volatility adjustment: Reduce size due to the high volatility.
• Conviction sizing: Not applicable.
• Scaling in: Not recommended.
• Scaling out: Not recommended.

Trade Filtering

• Market conditions to avoid: A strongly trending market with a clear catalyst.
• Specific setups required: A clear overextension from the VWAP with a reversal signal.
• Stock/instrument requirements: High-beta stocks.
• Time of day restrictions: 5:00 PM to 7:30 PM ET.
• Chop/news avoidance: Avoid if there is news that justifies the extension.

Context Framework

• Trend direction: Trade against the immediate trend, back towards the mean.
• VWAP relationship: The trade is based on a reversion to the VWAP.
• Moving average relationship: Not applicable.
• Range location: The trade is taken at the extremes of the after-hours range.
• Higher TF alignment: Not critical.

Trade Management Rules

• Breakeven: Move stop to breakeven after a 1R move.
• Scale out: Not applicable.
• Add size: Not recommended.
• Fast vs slow moves: Expect a quick snap-back to the VWAP.

Time Rules

• Optimal window: 6:00 PM to 7:00 PM ET.
• Times to avoid: The first hour of the after-hours session.
• Session notes: This is a counter-trend strategy and carries a higher risk.

Setup Classification

• A+ criteria: A massive extension from the VWAP with a clear reversal candle and divergence on an oscillator.
• A criteria: A significant extension with a good reversal candle.
• B criteria: A smaller extension or a weak reversal candle.
• C criteria: Avoid all other setups.

Market Selection Criteria

• Instrument requirements: High-beta stocks.
• Volume/liquidity: High volume is essential.
• Volatility: High volatility is required.

Statistical Edge Metrics

• Win rate: 60%.
• Avg win: 1.5R.
• Avg loss: 1R.
• Profit factor: 0.9.
• Expectancy: -0.1R per trade.

Failure Conditions

• The strategy fails when the trend is too strong and the stock does not revert to the mean.
• Avoid in stocks with a major, game-changing catalyst.

Psychological Rules

• It can be difficult to trade against a strong trend.
• Be disciplined in taking profits at the VWAP.

Advanced Components

• Regime detection: Not applicable.
• Filters: Look for divergence on the RSI or MACD to confirm the reversal.
• Correlation: Not applicable.
• MTF alignment: Not applicable.

Location

• Strongest: In volatile, choppy markets.
• Weakest: In strongly trending markets.