1. Pairs Trading / Statistical Arbitrage

Long undervalued + Short overvalued correlated pair (e.g. KO/PEP). Profit from spread convergence via Z-Score entry.

Z-Score of the spread — entry at ±2, exit at 0 (convergence)

Z-Score	Signal	Action
> +2	⚡ Entry	Long Weaker · Short Stronger
= 0	✅ Exit	Spread converges
> +3	⛔ Stop	Divergence too large
< -2	⚡ Entry	Reversed pair

Example KO/PEP: Z=+2.3 → Short KO, Long PEP · Hedge ratio β≈0.95

▸ At a Glance

📋 Setup

Correlation ≥ 0.80Z-Score > 2Hold period 5–20 dayssame sector

⚙️ Mgmt

Stop at Z > 3Recalculate hedge ratio dailyclose both legs simultaneously

🎯 Target

Exit at Z = 0Market-neutral base returnno directional market bias

📋 Setup

Correlation

How closely two assets move together. Pairs and dispersion strategies bet on them diverging or converging.

Mean Reversion

The assumption that an overstretched price will return to its mean. The opposite of trend-following — works in sideways or calm phases.A strongly oversold stock in an uptrend is bought for the bounce.

Support & Resistance

Price zones where buyers (support) or sellers (resistance) have dominated in the past. Key entry/exit reference points.

Structure:

Identify pair: historical correlation ≥ 0.80, same sector
Calculate Z-Score of the spread: entry at Z > +2 (Short Stronger, Long Weaker)
Exit at Z = 0 (spread convergence) or stop at Z > +3
Derive hedge ratio (beta-neutral) from regression

1

Choose two highly correlated stocks (same sector) whose price ratio has diverged.

2

Go long the weaker one, short the stronger — bet on the ratio returning to its mean (market-neutral).

3

✅ Ratio returns to the mean? Close both sides — profit from the difference.

4

⚠️ Ratio diverges further? Stop on the spread — correlation can break.

5

🔔 Correlation structurally broken (news, sector shift)? Close immediately.

✅ Market-neutral (minimal market risk)
✅ Low beta correlation
✅ Clear entry/exit math

⚠️ Correlation breakdown destroys the trade
⚠️ Short borrow costs
⚠️ Two simultaneous positions required

2. Sector & Asset Rotation

Rotate capital into the strongest sectors/ETFs by relative strength. Dorsey RS, P&F-BPI and momentum as signal generators.

Strongest sector (Energy) clearly outperforms — RS rating 92, BPI Bull Confirmed → overweight

▸ At a Glance

📋 Setup

RS Rating top quartileBPI Bull ConfirmedMonthly review cycleMax. 4 positions

⚙️ Mgmt

Monthly RS checkRotation on rank changeStop at BPI Bear Confirmedmax. 4 sectors simultaneously

🎯 Target

Profit from momentum effectsystematiclittle individual analysis per position

📋 Setup

Trend

The dominant direction of the price (up, down, or sideways). "The trend is your friend" — trade with the trend, not against it.Higher highs and higher lows = uptrend.

Relative Strength (RS Rating)

Measures how a stock performs compared to the overall market (0–100). Only trade the strongest — RS ≥ 80.

Seasonality

Statistically recurring price patterns at certain times of year. A tendency, not a law — always cross-check with the current trend.Heating oil tends to be strong before winter; grains around harvest time.

Structure:

Calculate relative strength of all sectors/ETFs (RS rating vs. S&P 500)
Top 3 by RS + BPI Bull Confirmed → buy candidates
Bottom 3 by RS + BPI Bear Confirmed → underweight / avoid
Monthly rotation: rebalance when RS ranking shifts

1

Compare relative strength across sectors — capital flows to leading industries.

2

Invest in the top 1–2 sectors (e.g., via sector ETFs); avoid the weak ones.

3

✅ Sector remains the leader? Hold; let the position run.

4

⚠️ Sector loses relative strength? Rotate into the new leader.

5

🔔 Monthly/quarterly check? Re-rank — rotation is medium-term, not daily.

✅ Systematic & rule-based
✅ Benefits from the momentum effect
✅ Little analysis per position

⚠️ Whipsaw during regime changes
⚠️ Transaction costs with frequent rotation
⚠️ Does not work in sideways markets

3. Turtle Trading / Donchian Breakout

Rule-based trend-following system: entry at n-day high/low (Donchian Channel), ATR-based position sizing, mechanical stops. Classic from Richard Dennis's Turtle Experiment (1983).

20-day Donchian Channel — breakout above the high triggers long entry, stop at channel low

▸ At a Glance

📋 Setup

20-day high/lowATR(20) for sizing2× ATR stoptrend intact

⚙️ Mgmt

Stop 2× ATR from entrytrail with Donchian opposite sidemax. 4 units per marketno early exits

🎯 Target

Ride large trends fullyrule-based without discretionexit on Donchian opposite-side break

📋 Setup

Donchian Channel

A channel formed by the highest high and lowest low of the past X days. A breakout above the high = buy signal (Turtle System).Enter above the 20-day high; exit below the 10-day low.

Breakout

The price breaks through a resistance level or the top of a base. A common entry point for trend-following — best with volume.

Trend

The dominant direction of the price (up, down, or sideways). "The trend is your friend" — trade with the trend, not against it.Higher highs and higher lows = uptrend.

⚙️ Mgmt

Stop-Loss

A pre-defined exit price that limits your loss. Essential for directional trades — the most important discipline of all.Entry 100, stop at 93 → max 7% loss.

Trailing Stop

A stop that moves up with rising prices. Locks in profits without cutting the trend short — "let your winners run."

Position Sizing

How large a position you choose, measured by risk per trade (e.g., 1% of account). More important for survival than your win rate.$10,000 account, 1% risk = max $100 loss per trade.

Structure:

System 1: breakout above 20-day high → Long; below 20-day low → Short
System 2: breakout above 55-day high → Long; below 55-day low → Short
Stops: 2× ATR(20) from entry, trail with Donchian opposite side
Position sizing: 1% risk per trade / 1× ATR(20) as 1 Unit

1

Use the Donchian Channel: enter on a breakout above the 20- (or 55-)day high.

2

Size positions by volatility (ATR) — keep risk per trade constant.

3

✅ Trend running? Trail with the 10-day low as your stop.

4

⚠️ Price falls below the exit channel? Exit mechanically — no debate.

5

🔔 System discipline? Take every breakout; no subjective filtering.

✅ Fully rule-based → ideal for backtesting
✅ Historically profitable trend following
✅ No room for interpretation

⚠️ Many false breakouts in sideways markets
⚠️ Large drawdowns
⚠️ Discipline required during losing entries

4. Gap Trading (Gap-and-Go / Gap-Fill)

Use opening gaps as setups: Gap-and-Go (continue momentum) or Gap-Fill (mean-reversion to prior-day close gap). Clear setup with daily reference.

Gap-Up: open significantly above prior-day close — Gap-and-Go (momentum) or Gap-Fill (reversal)

▸ At a Glance

📋 Setup

Gap > 1%Pre-market volume elevatedno earnings gapStop < gap level

⚙️ Mgmt

Only trade gaps > 1%Avoid earnings gapsclose position intradaystop at gap level

🎯 Target

Gap-and-Go: measured move from openGap-Fill: full fill to prior-day close

📋 Setup

Gap

A gap between the previous close and today's open. "Gap-and-Go" trades the continuation; "Gap-Fill" trades the closing of the gap.Stock closes at $100, opens at $105 = 5% gap.

Breakout

The price breaks through a resistance level or the top of a base. A common entry point for trend-following — best with volume.

Volume Confirmation

The number of shares traded. A breakout WITH clearly elevated volume is credible; without volume, it's suspect.Breakout on double the average daily volume = genuine buyer interest.

VWAP

Volume-Weighted Average Price for the day. Intraday reference for day traders: above VWAP = bullish bias; below = bearish.

Structure:

Pre-market: gap screener > 1% or < -1% vs. prior-day close
Gap-and-Go: first 5-min candle holds above gap level → entry with momentum
Gap-Fill: price turns back toward prior-day close → counter-trend entry
Stop: below/above the gap level (invalidation)

1

Pre-market: screen for stocks with a gap > 1% and elevated volume.

2

Gap-and-Go: does the first bar hold above the gap level? → Long with momentum, stop below the gap. Gap-Fill: does price reverse toward the prior close? → Counter-trade.

3

✅ Move running? Take partial profits; trail the stop.

4

⚠️ Earnings gap? Avoid — unpredictable.

5

🔔 Before market close? Flatten intraday — no overnight risk.

✅ Clear daily-reference setup
✅ High daytrading search volume
✅ Quick resolution (intraday)

⚠️ Earnings gaps unpredictable
⚠️ Requires pre-market monitoring
⚠️ High trade frequency demands discipline

5. Opening Range Breakout (ORB) / VWAP

Breakout from the first 15/30-minute range or VWAP as dynamic support/resistance. Daytrading standard in US markets, easily systematized.

Opening Range (first 15 min) as yellow zone — breakout above OR-High triggers long entry

▸ At a Glance

📋 Setup

First 15/30 min rangeVolume > 1.5× avgVWAP as direction filterSession 09:30–11:30 ET

⚙️ Mgmt

Stop at opposite range levelno holding through lunchuse VWAP as re-entry filter

🎯 Target

ORB: 2× range widthVWAP trade: resistance/supportintraday exit

📋 Setup

Opening Range

The high and low of the first 15–30 minutes of trading. A breakout above or below is a classic day-trading signal.

VWAP

Volume-Weighted Average Price for the day. Intraday reference for day traders: above VWAP = bullish bias; below = bearish.

Breakout

The price breaks through a resistance level or the top of a base. A common entry point for trend-following — best with volume.

Volume Confirmation

The number of shares traded. A breakout WITH clearly elevated volume is credible; without volume, it's suspect.Breakout on double the average daily volume = genuine buyer interest.

Structure:

Opening Range: first 15 or 30 minutes → define High/Low as range
ORB entry: breakout above OR-High (Long) or below OR-Low (Short) with elevated volume
VWAP: price above VWAP = bullish bias; pullback to VWAP = long entry
Stop: below OR-Low (Long) or above OR-High (Short)

1

Define the Opening Range: the high and low of the first 15–30 minutes.

2

Use VWAP as a directional filter: above VWAP = bullish bias; pullback to VWAP = entry.

3

✅ Breakout above OR high with volume? Long; stop below OR low (mirror for short).

4

⚠️ Price falls back into the range? Failed breakout — get out.

5

🔔 Midday / market close? Don't hold through the midday lull; close intraday.

✅ Daytrading standard
✅ Clear range as anchor
✅ VWAP universally used

⚠️ Requires intraday candles (no daily backtest)
⚠️ Requires active monitoring
⚠️ Only in volatile sessions

6. CANSLIM (William O'Neil)

William O'Neil's 7-criteria system for growth stocks: Current/Annual Earnings, New, Supply/Demand, Leader, Institutional, Market Direction.

Cup-with-Handle + volume spike on breakout — CANSLIM entry at pivot above the base

▸ At a Glance

📋 Setup

EPS +25%RS rating ≥ 80Breakout from base (Cup, VCP) with volumeMarket in uptrend

⚙️ Mgmt

Stop 7–8% below entryTrailing at 20–25% paper profitonly in confirmed market uptrend

🎯 Target

Growth stocks in early trend accelerationPivot from base as entryCompound over multiple legs

📋 Setup

Fundamentals

A company's business numbers (revenue, earnings, growth, valuation). The foundation of value and growth investing — the "why" behind the price.

Relative Strength (RS Rating)

Measures how a stock performs compared to the overall market (0–100). Only trade the strongest — RS ≥ 80.

Consolidation (Base)

A resting phase where the price moves sideways and builds energy before breaking out. Tight bases are the best launchpads.Cup-with-Handle, flag, or rectangle are classic base patterns.

Breakout

The price breaks through a resistance level or the top of a base. A common entry point for trend-following — best with volume.

52-Week High

The highest price of the past year. Stocks near their 52-week high are strong — new highs often attract more buyers.

Volume Confirmation

The number of shares traded. A breakout WITH clearly elevated volume is credible; without volume, it's suspect.Breakout on double the average daily volume = genuine buyer interest.

Trend

The dominant direction of the price (up, down, or sideways). "The trend is your friend" — trade with the trend, not against it.Higher highs and higher lows = uptrend.

Structure:

C + A: EPS last quarter ≥ +25% YoY AND 3-year growth ≥ 25% p.a.
N: new product/management OR 52W high breakout from consolidation base
S + L: volume spike on breakout, RS rating ≥ 80 in the industry
I + M: min. 3–5 institutional funds holding; overall market in uptrend

1

C + A: EPS growth current and multi-year ≥ 25%.

2

N + S + L: new product/high, volume spike on breakout, RS Rating ≥ 80. Enter at the pivot from a base.

3

✅ Breakout running? Trail your stop; let winners run.

4

⚠️ 7–8% below entry? Stop — limit the loss.

5

🔔 Market direction (M)? Only trade in a confirmed market uptrend.

✅ Fundamentals + technicals combined
✅ Historically strong win rate in bull markets
✅ Clear 7-criteria checklist

⚠️ Access to fundamental data required
⚠️ Only works in bull markets
⚠️ Very similar to Minervini template

7. From Setup to System: Backtesting Methodology

The six systems in this module are rule-based and therefore testable. A setup only becomes a system once its rules show a positive expectancy across many trades. Backtesting is the meta-discipline that separates a plausible setup from a viable system.

In-Sample, Out-of-Sample & Walk-Forward

Split the history: on the in-sample period you develop and optimise the rules, on the held-back out-of-sample period you test them on unseen data. The walk-forward analysis rolls this window forward repeatedly (optimise → test → shift) and is the toughest test: it simulates how the system would be re-tuned periodically in reality.

Spotting curve-fitting / overfitting

The most common self-deception: you optimise the rules until the past looks perfect, and then fail in the future. Warning signs:

Too many parameters or „special rules" for individual market phases.
A suspiciously smooth, almost linear equity curve.
Performance collapses out-of-sample.

Evaluation metrics

Metric	What it measures
Profit factor	Gross profit ÷ gross loss. > 1 = profitable, robust from ~1.5.
Expectancy (R-multiple)	Average win or loss per trade in multiples of the risk (1R) — the core expected value.
Max drawdown	Largest peak-to-trough capital decline — decides whether you can psychologically stick with the system.
CAGR / MAR ratio	Annual return, or annual return ÷ max drawdown — return relative to pain.
Sharpe / Sortino	Return per unit of risk; Sortino penalises only downside volatility.
Win rate × R/R	Win probability times reward-to-risk — a low win rate can be offset by a high reward-to-risk ratio.

Avoiding biases

Bias	Trap
Survivorship bias	Testing only names that still exist today — bankruptcies and delistings are missing and flatter the result.
Look-ahead bias	Using data that was not actually available at trade time (e.g. closing prices for an intraday decision).
Ignoring costs	Without realistic slippage + commission every high-frequency system becomes artificially profitable.

🎯 From backtest to forward test: A backtest remains a hypothesis about the past. The consistent forward test is your real trading journal: with sTraderZ.com you document every trade and evaluate it via strategy tags and dimensions — so you can see whether the edge found in the backtest also holds live.

Rank	Sector	RS	BPI
1	Energy (XLE)	92	🟢 Bull
2	Technology (XLK)	85	🟢 Alert
9	Utilities (XLU)	32	🔴 Bear
11	Real Estate (XLRE)	18	🔴 Bear

	System 1	System 2
Entry	20-day high/low	55-day high/low
Exit	10-day opposite side	20-day opposite side
Signals	More frequent	Less frequent
Stop	2 × ATR(20) from entry
Sizing	1% risk / 1× ATR = 1 Unit

	Gap-and-Go	Gap-Fill
Expectation	Momentum continues	Price reverts
Entry	5-min above gap high	Reversal candle
Target	Measured move	Prior-day close
Stop	Below gap level	Above gap high

Setup	Entry	Stop
ORB Long	Price > OR-High	Below OR-Low
ORB Short	Price < OR-Low	Above OR-High
VWAP Long	Pullback to VWAP	Below VWAP

Crit.	Threshold	Tool?
C / A	EPS +25% YoY	⚠️ manual
N	52W high breakout	✔ Range52W
S	Volume spike	✔ OBV/Vol
L	RS rating ≥ 80	✔ RS
I	≥ 3 funds holding	⚠️ manual
M	Market in uptrend	✔ BPI

⚙️ Systematic Stock Systems

In this Chapter

1. Pairs Trading / Statistical Arbitrage

2. Sector & Asset Rotation

3. Turtle Trading / Donchian Breakout

4. Gap Trading (Gap-and-Go / Gap-Fill)

5. Opening Range Breakout (ORB) / VWAP

6. CANSLIM (William O'Neil)

7. From Setup to System: Backtesting Methodology

In-Sample, Out-of-Sample & Walk-Forward

Spotting curve-fitting / overfitting

Evaluation metrics

Avoiding biases