Bond/Equity Correlation Trade

Entry Logic

• Long entry: 10-year Treasury yields (TNX) are rising, indicating a risk-on appetite. Go long equities (SPY).
• Short entry: 10-year Treasury yields are falling, indicating a risk-off or flight-to-safety move. Go short equities.
• Confirmation: A sustained move in yields over several days.
• Timeframe: Daily chart.
• Location: Any.
• Market Condition: A clear trend in interest rates.

Exit Logic

• Profit Target: A measured move target or 4R.
• Scaling Out: Scale out 50% at 2R.
• Trailing Stop: Trail a stop below the 20-day moving average.
• Signal Failure: If yields reverse course sharply.
• Opposite Signal: Not applicable.
• Time Expiration: Hold for several weeks.
• Momentum Loss: If the trend in yields stalls.

Stop Loss Structure

• Hard Stop: A 5% stop loss on the equity position.
• Soft Stop: If the correlation between yields and equities breaks down.
• Max Dollar Loss: $500 per trade.
• Max Percent Loss: 2.5% of account.
• Structural Stop: Below a major swing low on the daily chart.

Risk Management Framework

• Risk Per Trade: 2.5% of account.
• Daily Limit: Not applicable (swing trade).
• Weekly Limit: Not applicable.
• Max Drawdown: 15%.
• R:R Requirement: Minimum 2:1.

Position Sizing Model

• Sizing Approach: Fixed fractional.
• Volatility Adjustment: Not a primary concern.
• Conviction Sizing: Not recommended.
• Scaling In: Can add to the position on pullbacks.
• Scaling Out: Scale out at 2R.

Trade Filtering

• Market Conditions: A clear and persistent trend in bond yields.
• Setups: The relationship between yields and equities must be holding.
• Instruments: SPY, QQQ, and the TNX for analysis.
• Time Restrictions: Not applicable.
• Chop/News Avoidance: Be aware of FOMC meetings and inflation data releases.

Context Framework

• Trend Direction: Determined by the direction of bond yields.
• VWAP Relationship: Not applicable.
• MA Relationship: Use the 50-day and 200-day moving averages for trend context.
• Range Location: Not applicable.
• Higher TF Alignment: The weekly chart should confirm the trend in yields.

Trade Management Rules

• Breakeven: Move stop to breakeven after 2R of profit.
• Scale Out: Scale out 50% at 2R.
• Add Size: Add on successful pullbacks that hold key moving averages.
• Fast vs Slow Moves: This is a slow-moving, long-term strategy.

Time Rules

• Optimal Window: Not applicable.
• Times to Avoid: Not applicable.
• Session Notes: A position trading strategy, not a day trade.

Setup Classification

• A+ Setup: A strong, multi-month trend in bond yields.
• A Setup: A good, established trend.
• B Setup: A choppy or weak trend in yields.
• C Setup: No clear trend in yields.

Market Selection Criteria

• Instruments: Broad market ETFs.
• Volume: High.
• Volatility: Any.

Statistical Edge Metrics

• Win Rate: 65%.
• Avg Win: 4R.
• Avg Loss: 1R.
• Profit Factor: 2.6.
• Expectancy: 1.9R per trade.

Failure Conditions

• Market Conditions: When the traditional correlation between bonds and equities breaks down (e.g., stagflation).
• Specific Scenarios: A geopolitical event causes a flight to safety in both bonds and the US dollar, while equities also fall.

Psychological Rules

• Mental Discipline: Requires extreme patience and a long-term perspective.

Advanced Components

• Regime Detection: The strategy is based on detecting the interest rate regime.
• Filters: Not needed.
• Correlation: The core of the strategy.
• MTF Alignment: Weekly and monthly charts provide important context.

Location

• Strongest: During clear economic cycles of expansion or contraction.
• Weakest: During periods of economic uncertainty and sideways markets.