GARCH Model Volatility Trade

Entry Logic

• Entry trigger: A GARCH model forecasts a significant increase or decrease in volatility.
• Confirmation: The forecast is supported by other technical or fundamental factors.
• Timeframe: Daily or weekly chart.
• Location context: Not applicable.
• Market condition: The market is poised for a change in volatility.

Exit Logic

• Profit target: When the GARCH model forecasts a return to normal volatility.
• Scaling out: Not applicable.
• Trailing stop: Not applicable.
• Signal failure exit: The GARCH model forecast proves to be incorrect.
• Opposite signal exit: The GARCH model forecasts a change in the opposite direction.
• Time expiration: Not applicable.
• Momentum loss: Not applicable.

Stop Loss Structure

• Hard stop: A predefined loss level based on the model's error rate.
• Soft stop: If the market does not behave as the model predicted.
• Max dollar loss: 2% of account capital.
• Max percent loss: 2% of account capital.
• Structural stop: Not applicable.

Risk Management Framework

• Risk per trade: 1% of account capital.
• Daily limit: Not applicable.
• Weekly limit: Not applicable.
• Max drawdown: 20% of account capital.
• R:R requirement: Based on the model's expected return.

Position Sizing Model

• Sizing approach: Based on the confidence in the model's forecast.
• Volatility adjustment: The model itself is a volatility adjustment.
• Conviction sizing: Not applicable.
• Scaling in: Not recommended.
• Scaling out: Not recommended.

Trade Filtering

• Market conditions to avoid: When the GARCH model has a high error rate.
• Specific setups required: A high-confidence forecast from the GARCH model.
• Instruments: Any liquid instrument.
• Time restrictions: Not applicable.
• Chop/news avoidance: Not applicable.

Context Framework

• Trend direction: Not applicable.
• VWAP relationship: Not applicable.
• MA relationship: Not applicable.
• Range location: Not applicable.
• Higher TF alignment: Not applicable.

Trade Management Rules

• Breakeven: Not applicable.
• Scale out: Not applicable.
• Add size: Not applicable.
• Fast vs slow moves: Not applicable.

Time Rules

• Optimal window: Not applicable.
• Times to avoid: Not applicable.
• Session notes: Not applicable.

Setup Classification

• A+ setup: A high-confidence forecast from a well-tested GARCH model.
• A setup: A moderate-confidence forecast.
• B setup: A low-confidence forecast.
• C setup: No clear forecast from the model.

Market Selection Criteria

• Instruments: Any liquid instrument with sufficient historical data to build a GARCH model.
• Volume: Not applicable.
• Volatility: The strategy is based on forecasting volatility.

Statistical Edge Metrics

• Win rate: Dependent on the accuracy of the GARCH model.
• Avg win: Dependent on the magnitude of the volatility change.
• Avg loss: Dependent on the model's error rate.
• Profit factor: Dependent on the model's performance.
• Expectancy: Dependent on the model's performance.

Failure Conditions

• When strategy fails: When the GARCH model is misspecified or the market behaves unexpectedly.
• Specific scenarios to avoid: Relying solely on the Garch model without any other confirmation.

Psychological Rules

• Mental discipline: Trust in the quantitative model.
• Key mental discipline requirements: The ability to accept that the model will not be right all the time.

Advanced Components

• Regime detection: The GARCH model can be used as a regime detection tool.
• Filters: Not applicable.
• Correlation: Not applicable.
• MTF alignment: Not applicable.

Location

• Where strongest: In markets that exhibit predictable volatility patterns.
• Where weakest: In markets that are subject to frequent structural breaks.