Worked examples: swing trades

Step 1: the question. With SPX in a clear Stage 2, its RSI(2) reads 8 at Friday's close after a 1.2% pullback to the 21-day EMA, and the composite signal is +45. Should you take the trade?

Step 2: the score. With $E = 0.85$, $M = 0.90$, $R = 0.85$, $X = 0.90$ and $S = 0.90$, the conviction score is $C = 0.527$, high conviction, so take the trade at full size.

Step 3: the outcome. Monday opens slightly higher and you enter at 5,955, then exit on Wednesday at 6,040, a gain of 85 points, which is $850 per contract, or $10 a contract for each point.

Step 4: the lesson. When all five factors align, take the trade at the size its conviction implies.

Step 1: the question. The setup geometry is the same as Example 1's, but the composite is only +15.

Step 2: the score. With the regime factor down to $R = 0.55$ and the other four factors as in Example 1, $C = 0.85 \times 0.90 \times 0.55 \times 0.90 \times 0.90 = 0.341$: medium conviction, taken at reduced size.

Step 3: the outcome. SPX rallies briefly, then sells through Friday's low. The stop is hit at 5,920, for a loss of $3,500, 140% of the planned loss. Since the planned loss was therefore $3{,}500/1.4 = \$2{,}500$, the exit came below the level the plan assumed, through the slippage and gap risk of Chapter 13C.

Step 4: the lesson. A lower R means a smaller size. The same setup geometry produces different outcomes in different regimes.

Step 1: the question. SPY has consolidated in a 2.5% range for 9 sessions, with ADX falling to 15, the VIX at 13 and the composite at +60. It breaks above the range high on 145% of its average volume.

Step 2: the score. With $E = 0.75$, $M = 0.85$, $R = 0.90$, $X = 0.95$ and $S = 0.90$, $C = 0.491$, so take it. Just under 0.5, the score is formally medium conviction, which the figure of Chapter 13B sizes at 60% to 80% of full size.

Step 3: the outcome. SPY rallies to its target of 608 over 8 sessions, for a profit of $4,350, about 1.7R, so the planned risk was about $4{,}350/1.7 = \$2{,}560$.

Step 4: the lesson. Range expansions in regimes of positive gamma exposure (GEX) carry a tailwind from dealer hedging (Chapter 11H).

Step 1: the question. It is Example 3's SPY setup again, with the VIX at 19 and the composite at +5.

Step 2: the score. The regime factor falls to $R = 0.35$, so $C = 0.75 \times 0.85 \times 0.35 \times 0.95 \times 0.90 = 0.191$: insufficient, and you pass. Chapter 11H's rules agree, since its Compression Breakout needs a VIX below 18 and a composite of +30 or more.

Step 3: the outcome. SPY rallies briefly to 595, then fails back into its range on day 2. By day 7 it is at 572, 23 points or 3.9% below the failed breakout's high.

Step 4: the lesson. The trades you do not take are as important as the trades you do.

Step 1: the question. AAPL undercuts its 200-day moving average, then reclaims it in a clean reversal during the day.

Step 2: the score. With $E = 0.65$, $M = 0.80$, $R = 0.75$, $X = 0.85$ and $S = 0.85$, $C = 0.282$, below 0.3: insufficient conviction, which by Chapter 13B means pass.

Step 3: what the trade did. The Dealer Mechanics Lab's version of this example calls the score "medium-low" and takes the trade at reduced size. AAPL then hits its time stop at 172, for a profit of $1,000, or 1R.

Step 4: the lesson. The Undercut and Reclaim setup has lower evidence than the Trend Pullback. Treat the framework's outputs literally: a smaller score means a smaller size, and below 0.3 it means no position. The $1,000 does not validate the entry, because a rule broken on a winning trade is still broken.

Step 1: the question. QQQ closes near the day's low, with RSI(2) at 9, the trend in Stage 2 and the composite at +35. The day's high was $517.00, its low $513.00 and its close $513.50, so its internal bar strength is $(513.50 - 513.00)/(517.00 - 513.00) = 0.125$.

Step 2: the score. $C = 0.413$, so take the trade.

Step 3: the plan, with its R. Enter at $513.50, the close, and put the stop at $511.50, below the day's low of $513.00 with a noise buffer of $1.50. The buffer matters because IBS mean reversion fails most often on a gap that takes out the low during the day before turning. The initial risk is $2.00 a share, so a risk budget of $10,000 buys 5,000 shares.

Step 4: the outcome. QQQ gaps up the next morning and rallies to a high of $518.50. You exit at the close, $518.00, because the rule is a close above the prior day's high of $517.00. The realized profit and loss (P&L) is $22,500, which is $(518.00 - 513.50) \times 5{,}000$, and the R-multiple is $4.50/2.00 = 2.25$R.

Step 5: the lesson. Combining indicators that measure different features, IBS a single day and RSI(2) several, is genuine confluence. The narrow but realistic stop, wide enough to survive the morning's noise on a volatile index ETF, is what keeps the strategy alive over a sample of trades. A stop $0.20 below the low gives a much higher R on the winners. But it stops the strategy out of half the trades that would have worked, destroying the expectancy. Beware the fantasy that a narrow stop means a high R: a stop set inside the natural noise just turns winners into losers.

Step 1: the question. Two days before a meeting of the Federal Open Market Committee (FOMC), SPX shows a clean Trend Pullback, with the composite at +40.

Step 2: the score. The event's uncertainty lowers the regime factor to $R = 0.70$ and sizing to $S = 0.75$. With evidence, mechanism and execution as in Example 1, $C = 0.85 \times 0.90 \times 0.70 \times 0.90 \times 0.75 = 0.361$, medium conviction, so take it at 50% of full size.

Step 3: the outcome. The FOMC leaves rates unchanged, and volatility is crushed after the announcement, an IV crush. The trade makes 0.5R on the full-size measure, which at half size is $0.5\text{R} \times 0.5 = 0.25$R.

Step 4: the lesson. Cutting size in a window of event risk protects against path-dependent downside while keeping the option on a favorable outcome. The FOMC overlay of Chapter 13F makes the halving a rule, from two days before the meeting to one day after it (Chapter 10G).

Step 1: the question. NVDA's momentum signal fires 5 days before its earnings report, with the options implying a move of ±9%, the expected move of Chapter 11A.

Step 2: the score. With $E = 0.55$, $M = 0.65$, $R = 0.80$, $X = 0.85$ and $S = 0.40$, $C = 0.097$: insufficient, so pass.

Step 3: the outcome. NVDA gaps 7% on the report.

Step 4: the lesson. A single-stock position held through an event week needs a defined-risk structure, not naked shares. The trades you skip are sometimes the trades that would have hurt you most.

Step 1: the question. You are long SPY from 580, with a stop at 575, and the price has fallen to 576.50. Should you move the stop to 572?

Step 2: the conclusion. Keep the stop at 575, which triggers and fills at 574.20: a loss of $580, which at $5.80 a share means 100 shares. The migrated stop at 572 would fill at 570.50, a loss of $950. That is $950/580 = 1.64$ times the loss at the original stop: 64% more than the original plan.

Step 3: the lesson. Stops exist to terminate failed theses, not to be argued with. Once a stop is set, the only allowable change is to close the trade early, never to move the stop further away.

Step 1: the question. Two correlated setups fire at once: a Trend Pullback on SPY and an Undercut and Reclaim on AAPL. Both pass conviction, so how should you size them?

Step 2: the conclusion. Use a portfolio-level loss budget, not two trades' budgets. The maximum simultaneous risk is 2% of the portfolio, $8,000, which puts the portfolio at $400,000. Give $5,000 of it to SPY and $3,000 to AAPL.

Step 3: the lesson. Correlated positions share risk. Sizing each trade as if it were independent builds more total exposure than the account can carry, because one market drop can stop both out on the same day. When correlated trades are open together, budget them as one.