Trading Plan - Day Trade Mean Reversion

Below is my written trading plan describing the aspects of my mean reversion trading system such as market breadth, entry/exit criteria, and risk management.  I am continually researching improved methods for the system, therefore this is a fluid document that will be updated as needed.  All times are central time zone.

Objective:
To buy or sell a basket of at least 20 stocks that are over-extended at the close each day, and exit positions on the following close targeting an average daily gain of 0.5% and zero correlation with the Russell 2000 index (IWM) returns.

Market Breadth:

• Calculate market breadth indicator at 2:25pm
• If market breadth indicator is greater than yesterday, then enter stocks long at end of day
• If market breadth indicator is lower than yesterday, then enter stocks short at end of day

Long Entry Criteria:

• Price per share must be greater than $2.00 at time of entry in order to keep the commissions on each stock to less than 0.25% (IB commission is $0.005/share)
• The daily volume must be greater than 250,000 shares for the previous day
• The daily volume must be greater than 150,000 shares at 2:30pm on the entry day
• The dollar volume must be greater than $2,000,000 for the previous day
• The dollar volume must be greater than $1,500,000 at 2:30pm on the entry day
• Sort stock universe by overextended scan at 2:30pm, and select the best 25 candidates.
• Check to see if the stock was selected as a position yesterday.  If it was, see the consecutive entries section.
• Enter orders after 2:30pm each day.  Buy stocks at the end of the day using a Market-on-Close (MOC) order.  If MOC order is not functioning, place a limit order at the bid price between 2:55-3pm.

Short Entry Criteria:

• Price per share must be greater than $2.00 at time of entry in order to keep the commissions on each stock to less than 0.25% (IB commission is $0.005/share)
• The daily volume must be greater than 250,000 shares for the previous day
• The daily volume must be greater than 150,000 shares at 2:30pm on the entry day
• The dollar volume must be greater than $2,000,000 for the previous day
• The dollar volume must be greater than $1,500,000 at 2:30pm on the entry day
• All stocks that have moved based on mergers and acquisitions news in the past 10 trading days should be removed from the stock universe.
• Sort stock universe by overextended scan at 2:30pm, and select the best 25 candidates.
• Check to see if the stock was selected as a position yesterday.  If it was, see the consecutive entries section.
• Enter orders after 2:30pm each day.  Buy stocks at the end of the day using a Market-on-Close (MOC) order.  If MOC order is not functioning, place a limit order at the ask price between 2:55-3pm.

Consecutive Entries Showing a Loss:

• A trading candidate may be selected on consecutive days in a row, which will change the entry and exit order procedure because you do not want to waste money on commissions to exit a position and then immediately enter the same position.
• If the position is up for renewal, determine the position size by subtracting the liquidation value (ex. $15,000) of the position at 2:30pm from the normal position size equity value (ex. $20,000).
• Determine the number of shares that can be entered using the last price at 2:30pm for the difference in position size equity value (ex. $20,000-$15,000 = $5000).
• Do not close out the current renewal position ($15,000)
• Add to the existing position ($5000) at the end of the day using a Market-on-Close (MOC) order.  If MOC order is not functioning, place a limit order at the bid for longs and at the ask for shorts between 2:55-3pm.
• At the end of the day, the total liquidation value of the new combined position should be equal to the normal position size equity value (ex. $15,000 + $5000 = $20,000).

Consecutive Entries Showing a Profit:

• A trading candidate may be selected on consecutive days in a row, which will change the entry and exit order procedure because you do not want to waste money on commissions to exit a position and then immediately enter the same position.
• If the position is up for renewal, determine the position size by subtracting the liquidation value (ex. $25,000) of the position at 2:30pm from the normal position size equity value (ex. $20,000).
• Determine the number of shares that can be exited using the last price at 2:30pm for the difference in position size equity value (ex. $20,000-$25,000 = -$5000).
• Do not close out the entire renewal position ($25,000)
• Exit a portion of the existing position (-$5000) at the end of the day using a Market-on-Close (MOC) order.  If MOC order is not functioning, place a limit order at the bid for longs and at the ask for shorts between 2:55-3pm.
• At the end of the day, the total liquidation value of the new position should be equal to the normal position size equity value (ex. $25,000 - $5000 = $20,000).

 

Risk Management:

• Target portfolio size is between $400,000-$500,000 with 20 to 25 simultaneous positions.
• Position size for each stock cannot be greater than 1% of the minimum dollar volume from the previous 2 days
• A minimum of 20 stocks must be bought or sold each day to reduce volatility risk from anyone stock
• All positions will be sized equally with respect to total portfolio equity
• A stop loss of 5% will be used for each position and entered after close on the day of entry and before the market opens on the day following entry.
• No position order will be filled during pre or post primary market hours.
• Average maximum loss on any single position should be  less than 0.25% of the portfolio (20 positions = 5% of portfolio equity, multiplied by 5% stop loss is 0.25%)

Exit Criteria:

• The following morning after order entry, a stop loss of 5% is placed before 8:30am  (market open) using a stop order (STP).
• If the stop loss has not triggered between 8:30am and 2:30pm, then the consecutive entry candidates are determined.  Positions that are not up for renewal will be exited on the close using a Market-On-Close (MOC) order.  The MOC order is placed after 2:30pm (on the day following order entry).

Timeline of Trading Tasks:

• 02:25pm - determine market breadth (long/short)
• 02:30pm - scan for new candidates and determine renewal candidates
• 02:35pm - enter MOC exit orders for non renewal candidates
• 02:40pm - enter MOC entry orders for non renewal candidates
• 02:45pm - enter MOC entry orders for renewal candidates
• 02:55pm - enter any limit orders for any candidates that would not accept MOC orders
• 03:05pm - cancel any remaining stop loss orders from the day that did not trigger
• 03:10pm-08:00am - enter stop loss exit orders for all positions based on average position cost and number of shares for position