Small Cap Breakout Trade

Entry Logic

• Exact Entry Trigger: A small-cap stock (market cap $300M - $2B) breaks out of a well-defined base of at least 2 months.
• Confirmation: The breakout occurs on volume at least 2x the 50-day average, and the stock closes near its high for the day.
• Timeframe: Daily chart for the pattern, 60-minute for entry.
• Location Context: The breakout should clear a significant resistance level.
• Market Condition: Bullish or neutral market.

Exit Logic

• Profit Target(s): 20-30% target based on the depth of the preceding base.
• Scaling Out: Sell half at a 20% gain, trail the rest with the 20-day EMA.
• Trailing Stop: A close below the 20-day EMA.
• Signal Failure: The breakout fails and the stock closes back inside the base within 3 days.
• Opposite Signal: A major negative news event.
• Time Expiration: 3-6 months.
• Momentum Loss: The stock fails to show follow-through and drifts sideways for several weeks.

Stop Loss Structure

• Hard Stop: 8% below the entry price.
• Soft Stop: A close below the breakout point.
• Maximum Dollar Loss: $800 per trade.
• Maximum Percent Loss: 8% of the trade value.
• Structural Stop: The midpoint of the consolidation base.

Risk Management Framework

• Risk Per Trade: 1% of the account.
• Maximum Daily Loss: Not applicable.
• Maximum Weekly Loss: Not applicable.
• Maximum Drawdown: 15% of the account.
• R:R Requirement: Minimum 2.5:1.

Position Sizing Model

• Sizing Approach: Volatility-adjusted position sizing.
• Volatility Adjustment: Use the 20-day ATR to calculate position size.
• Conviction Sizing: A+ setups (picture-perfect base, catalyst) get full size.
• Scaling In: Can add on a successful retest of the breakout level.
• Scaling Out: As per exit logic.

Trade Filtering

• Market Conditions to Avoid: Bear markets.
• Specific Setups: Look for classic chart patterns like cups with handles, flat bases, or ascending triangles.
• Instrument Requirements: Small-cap stocks with a history of growth.
• Time Restrictions: None.
• Chop/News Avoidance: Avoid entering right before an earnings report.

Context Framework

• Trend Direction: The stock is moving from a sideways trend to an uptrend.
• VWAP Relationship: The breakout should occur above the quarterly and yearly VWAP.
• MA Relationship: The 50-day SMA should be trending up, and the breakout should clear the 200-day SMA if below it.
• Range Location: Breaking out of the top of a multi-month range.
• Higher TF Alignment: The weekly chart should confirm the base and breakout.

Trade Management Rules

• Breakeven: Move stop to entry after the stock has moved up by the initial risk amount.
• Scale Out: At predefined targets.
• Add Size: On a successful pullback and retest.
• Fast vs Slow Moves: Manage with the 20-day EMA. A strong trend should respect this average.

Time Rules

• Optimal Window: Any time the setup occurs.
• Times to Avoid: The last week of the year due to low volume.
• Session Notes: Not session-dependent.

Setup Classification

• A+ Criteria: A long (6+ month) and tight (<15% deep) base with a clear catalyst on breakout.
• A Criteria: A well-formed base of 2+ months with a volume-supported breakout.
• B Criteria: A sloppier, wider base.
• C Criteria: A breakout on low volume.

Market Selection Criteria

• Instruments: Small-cap common stocks.
• Volume/Liquidity: Minimum 200,000 shares average daily volume.
• Volatility: Moderate to high.

Statistical Edge Metrics

• Expected Win Rate: 45-55%.
• Average Win Size: 25-40%.
• Average Loss Size: 7-9%.
• Profit Factor: 3.0+.
• Expectancy: High.

Failure Conditions

• Market Conditions: A market correction can cause even the best breakouts to fail.
• Specific Scenarios: The breakout was a 'bull trap' designed to lure in retail traders before a price drop.

Psychological Rules

• Mental Discipline: Must have the patience to wait for proper bases to form and the discipline to cut a failed breakout quickly.

Advanced Components

• Market Regime Detection: A bullish market environment provides a strong tailwind.
• Filters: Scan for stocks forming multi-month bases.
• Correlation: Check if the stock's industry group is also showing strength.
• MTF Alignment: A weekly breakout is a very strong confirmation.

Location

• Where Strongest: In the early to middle stages of a bull market.
• Where Weakest: In a bear market.