Short Interest Extreme Trade

Entry Logic

• Exact Entry Trigger: A stock's short interest as a percentage of float exceeds 30%.
• Confirmation: The stock price begins to base and breaks a short-term downtrend line.
• Timeframe: Daily chart for the signal, 60-minute for entry.
• Location Context: The stock has been in a long-term downtrend and is showing signs of bottoming.
• Market Condition: Improving market sentiment.

Exit Logic

• Profit Target(s): A 20-30% move, as the initial squeeze begins.
• Scaling Out: Sell 1/3 at 10%, 1/3 at 20%, and trail the final third.
• Trailing Stop: A 10-day EMA.
• Signal Failure: The stock makes a new major low.
• Opposite Signal: A large wave of selling, indicating the shorts are not yet pressured.
• Time Expiration: 2-3 months.
• Momentum Loss: The stock fails to follow through on the initial breakout.

Stop Loss Structure

• Hard Stop: 10% below entry.
• Soft Stop: A close below the recent swing low.
• Maximum Dollar Loss: $1000 per trade.
• Maximum Percent Loss: 10% of the trade value.
• Structural Stop: Below the bottoming consolidation pattern.

Risk Management Framework

• Risk Per Trade: 1% of the account.
• Maximum Daily Loss: Not applicable.
• Maximum Weekly Loss: Not applicable.
• Maximum Drawdown: 20% of the account.
• R:R Requirement: Minimum 2:1.

Position Sizing Model

• Sizing Approach: Half-size positions due to the high risk.
• Volatility Adjustment: These stocks are inherently volatile; size accordingly.
• Conviction Sizing: Full (half) size for A+ setups where a catalyst is present.
• Scaling In: Can add on a successful retest of the breakout level.
• Scaling Out: As per exit logic.

Trade Filtering

• Market Conditions to Avoid: Severe bear markets where shorts are in control.
• Specific Setups: Look for a potential catalyst that could ignite a squeeze (earnings, news).
• Instrument Requirements: Stocks with high short interest but a solvent balance sheet.
• Time Restrictions: None.
• Chop/News Avoidance: Be aware of upcoming binary events.

Context Framework

• Trend Direction: Long-term downtrend, but with signs of a potential reversal.
• VWAP Relationship: Price is likely far below the yearly VWAP.
• MA Relationship: Price is likely below the 50 and 200-day SMAs, but may be attempting to reclaim the 20-day EMA.
• Range Location: In the lower part of its yearly range.
• Higher TF Alignment: Not expected.

Trade Management Rules

• Breakeven: Move stop to entry after a 10% gain.
• Scale Out: Aggressively take profits into strength.
• Add Size: Cautiously, on successful retests.
• Fast vs Slow Moves: Be prepared for extremely fast, volatile moves.

Time Rules

• Optimal Window: Any time the setup appears.
• Times to Avoid: Entering just before a known negative catalyst.
• Session Notes: Squeezes can happen at any time.

Setup Classification

• A+ Criteria: Short interest > 40%, a clear catalyst, and a technical breakout.
• A Criteria: Short interest > 30% and a technical breakout.
• B Criteria: High short interest but the chart pattern is not yet constructive.
• C Criteria: Avoid.

Market Selection Criteria

• Instruments: Common stocks, often in the biotech or tech sectors.
• Volume/Liquidity: Minimum 1 million shares average daily volume.
• Volatility: High.

Statistical Edge Metrics

• Expected Win Rate: 30-40%.
• Average Win Size: 50-100%+.
• Average Loss Size: 10-15%.
• Profit Factor: 2.5+.
• Expectancy: Highly positive due to the skewed risk/reward.

Failure Conditions

• Market Conditions: The shorts are right and the company's fundamentals continue to deteriorate.
• Specific Scenarios: A negative news event validates the short thesis.

Psychological Rules

• Mental Discipline: This is a high-risk, high-reward strategy. You must be able to stomach large drawdowns and volatility.

Advanced Components

• Market Regime Detection: A 'risk-on' environment is more conducive to squeezes.
• Filters: Use a scanner for stocks with short interest > 30%.
• Correlation: Not a primary factor.
• MTF Alignment: Not expected.

Location

• Where Strongest: In beaten-down stocks with a high level of pessimism already priced in.
• Where Weakest: In strong, trending stocks where short interest is low.