MLP Distribution Trade

Entry Logic

• Exact Entry Trigger: A Master Limited Partnership (MLP) with a history of stable or growing distributions is trading at a high yield (>8%) and is in a technical uptrend.
• Confirmation: The underlying commodity that drives the MLP's revenue (e.g., oil, natural gas) is in a stable or bullish trend.
• Timeframe: Weekly chart for trend, daily for entry.
• Location Context: The MLP has pulled back to a key support level, like the 50-day or 200-day SMA.
• Market Condition: Stable or rising energy prices.

Exit Logic

• Profit Target(s): A 15% price appreciation, plus the captured distributions.
• Scaling Out: Not typically scaled; the goal is to capture the full move and yield.
• Trailing Stop: A close below the 200-day SMA.
• Signal Failure: The MLP announces a distribution cut.
• Opposite Signal: The underlying commodity breaks down into a bear market.
• Time Expiration: 12-24 months.
• Momentum Loss: The stock stagnates for an extended period.

Stop Loss Structure

• Hard Stop: 10% below entry.
• Soft Stop: A distribution cut is an automatic exit signal.
• Maximum Dollar Loss: $1000 per trade.
• Maximum Percent Loss: 10% of the trade value.
• Structural Stop: Below the prior major swing low.

Risk Management Framework

• Risk Per Trade: 1.5% of the account.
• Maximum Daily Loss: Not applicable.
• Maximum Weekly Loss: Not applicable.
• Maximum Drawdown: 20% of the account.
• R:R Requirement: Minimum 1.5:1 on price appreciation alone.

Position Sizing Model

• Sizing Approach: Position size based on the yield and risk, aiming for a target income stream.
• Volatility Adjustment: Standard sizing.
• Conviction Sizing: Larger positions in MLPs with investment-grade credit ratings and strong balance sheets.
• Scaling In: Can add on dips to support.
• Scaling Out: Not applicable.

Trade Filtering

• Market Conditions to Avoid: A bear market in the underlying commodity.
• Specific Setups: Focus on MLPs with a strong history of distribution coverage (Distributable Cash Flow > Distributions Paid).
• Instrument Requirements: Midstream MLPs with fee-based revenue are generally more stable.
• Time Restrictions: None.
• Chop/News Avoidance: Be aware of regulatory news affecting the energy sector.

Context Framework

• Trend Direction: The MLP must be in a confirmed daily and weekly uptrend.
• VWAP Relationship: Not a primary factor.
• MA Relationship: Entry at or near the 50-day or 200-day SMA in an uptrend.
• Range Location: Not a range-based trade; it's a trend and income trade.
• Higher TF Alignment: Weekly uptrend is mandatory.

Trade Management Rules

• Breakeven: Not a primary concern.
• Scale Out: Not applicable.
• Add Size: On pullbacks to key support.
• Fast vs Slow Moves: This is a slow, long-term strategy.

Time Rules

• Optimal Window: During periods of stable or rising energy prices.
• Times to Avoid: When the underlying commodity is crashing.
• Session Notes: Not session-dependent.

Setup Classification

• A+ Criteria: A high-quality MLP pulling back to its 200-day SMA in a bull market for its commodity, with a yield >8%.
• A Criteria: An MLP in an uptrend with a good yield.
• B Criteria: A high-yield MLP in a sideways trend.
• C Criteria: Any MLP that has recently cut its distribution.

Market Selection Criteria

• Instruments: Master Limited Partnerships.
• Volume/Liquidity: Should be reasonably liquid (>250k ADV).
• Volatility: Moderate.

Statistical Edge Metrics

• Expected Win Rate: 60-70%.
• Average Win Size: 15% price + 8% yield = 23%.
• Average Loss Size: 10%.
• Profit Factor: 2.5+.
• Expectancy: High.

Failure Conditions

• Market Conditions: A collapse in the price of the underlying commodity.
• Specific Scenarios: A sudden, unexpected distribution cut, which will cause a sharp price drop.

Psychological Rules

• Mental Discipline: This is an income-focused strategy. You must have the patience to hold for the long term and collect distributions.

Advanced Components

• Market Regime Detection: Understanding the cycle for the underlying commodity is key.
• Filters: Screen for MLPs with strong balance sheets and high distribution coverage ratios.
• Correlation: High correlation to the underlying commodity.
• MTF Alignment: Daily and weekly charts must be in an uptrend.

Location

• Where Strongest: In a bull market for energy or the specific commodity the MLP transports/stores.
• Where Weakest: In a deep bear market for that commodity.