Grok's High Probability Trend-Momentum Breakout System

[greggles]

After a few beers tonight I decided to ask Grok AI to develop a high probability trading system using:

1. Three primary indicators
2. Two supplementary trading indicators to refine entries and exits
3. Short and long term support and resistance levels

This is what I got:

To construct a high-probability trading system using the top three indicators—Moving Averages (MA), Relative Strength Index (RSI), and Volume—alongside two complementary indicators and incorporating short- and long-term support and resistance (S/R) levels for entries and exits, we need a system that balances trend identification, momentum confirmation, volume validation, and precise entry/exit triggers. Below is a detailed trading system designed to maximize consistency and probability, tailored for swing or positional trading across stocks, forex, or crypto (adaptable to other assets). The system is called the "Trend-Momentum Breakout System".
Complementary Indicators
To complement MA, RSI, and Volume, we select:

1. MACD (Moving Average Convergence Divergence): Enhances trend and momentum analysis by showing the relationship between two EMAs (typically 12 and 26 periods) and a signal line (9-period EMA). MACD confirms trend direction and momentum shifts, complementing MA’s trend signals and RSI’s overbought/oversold insights.
2. Bollinger Bands (BB): Measures volatility and identifies price extremes relative to a 20-period SMA and two standard deviations. BB helps pinpoint breakout opportunities and reversals at S/R levels, complementing Volume’s confirmation of breakout strength.

These indicators synergize with MA, RSI, Volume, and S/R by adding momentum precision (MACD) and volatility context (BB), creating a robust framework for high-probability setups.

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Trend-Momentum Breakout System
1. System Overview

• Objective: Identify high-probability entries and exits in trending markets by combining trend-following (MA, MACD), momentum (RSI, MACD), volatility (BB), and volume confirmation at key short- and long-term S/R levels.
• Timeframe: Daily or 4-hour charts for swing trading (adjustable to 1-hour for shorter-term trades or weekly for longer-term).
• Assets: Stocks, forex, crypto, or indices with sufficient liquidity and volatility.

2. Indicator Settings

• Moving Averages:
  • Fast EMA: 20-period (short-term trend).
  • Slow EMA: 50-period (medium-term trend).
  • Long SMA: 200-period (long-term trend, aligns with long-term S/R).
• RSI: 14-period, with overbought (70), oversold (30), and centerline (50) levels.
• Volume: Raw volume with a 20-period SMA to gauge relative spikes; optionally use On-Balance Volume (OBV) for trend confirmation.
• MACD: Standard 12, 26, 9 settings (fast EMA, slow EMA, signal line).
• Bollinger Bands: 20-period SMA, 2 standard deviations.
• Support/Resistance:
  • Short-term S/R: Identified via recent swing highs/lows on daily/4-hour charts (past 1-3 months).
  • Long-term S/R: Identified via major swing highs/lows on weekly/monthly charts (past 6-12 months) or psychological levels (e.g., round numbers like 1.2000 in forex).

3. Entry Rules
A trade is entered when all of the following conditions align at a short- or long-term S/R level:

1. Trend Confirmation (MA):
   • Price is above the 20-EMA and 50-EMA, and 20-EMA is above 50-EMA (bullish trend for long trades).
   • Price is below the 200-SMA only if targeting a mean-reversion trade at long-term support (rare).
   • For shorts, reverse: price below 20-EMA and 50-EMA, with 20-EMA below 50-EMA.
2. Momentum (RSI):
   • RSI is above 50 (bullish momentum) but below 70 (not overbought) for longs.
   • RSI shows bullish divergence (price makes lower low, RSI makes higher low) at support for higher-probability setups.
   • For shorts, RSI below 50 but above 30, or bearish divergence at resistance.
3. Volume Confirmation:
   • Volume spikes above its 20-period SMA (or OBV rising) during a breakout above resistance (long) or below support (short).
   • Avoid entries on low volume (below 20-period SMA), as it suggests weak conviction.
4. MACD Confirmation:
   • MACD line crosses above signal line and is above zero (bullish) for longs.
   • For shorts, MACD line crosses below signal line and is below zero (bearish).
5. Bollinger Bands Context:
   • Price breaks above the upper BB (long) or below the lower BB (short) during a breakout at S/R, indicating strong momentum.
   • Alternatively, price touches the lower BB at support (long) or upper BB at resistance (short) for mean-reversion setups.
6. S/R Trigger:
   • Price breaks and closes above a short- or long-term resistance (long) or below support (short) on the chosen timeframe.
   • Use candlestick patterns (e.g., bullish engulfing at support, bearish engulfing at resistance) to confirm the breakout.

Example Long Entry:

• Price breaks above a short-term resistance (e.g., $100, a recent swing high).
• 20-EMA is above 50-EMA, both above 200-SMA (bullish trend).
• RSI is at 55 (bullish, not overbought).
• Volume spikes 50% above its 20-period SMA.
• MACD line crosses above signal line, above zero.
• Price breaks above upper BB, confirming breakout strength.

4. Exit Rules
Exits are based on S/R levels, indicator signals, and risk management:

1. Profit Target:
   • Exit at the next significant short- or long-term S/R level (e.g., if entering at $100 resistance breakout, target $110, the next major resistance).
   • Alternatively, use a 2:1 or 3:1 reward-to-risk ratio based on stop-loss distance.
2. Stop-Loss:
   • Place below the most recent swing low (long) or above the recent swing high (short), typically 1-2% below/above the S/R level.
   • Ensure stop-loss is outside the 20-EMA or lower BB (long) for added buffer.
3. Trailing Stop:
   • Trail using the 20-EMA (exit if price closes below it for longs, above for shorts) or a fixed percentage (e.g., 2%) to lock in profits.
4. Indicator-Based Exits:
   • Exit longs if RSI enters overbought (>70) and shows bearish divergence, or MACD crosses below the signal line.
   • Exit if Volume drops significantly during the trend (below 20-period SMA), suggesting weakening momentum.
   • Exit if price falls back inside BB after a breakout, indicating potential failure.
5. Time-Based Exit (Optional):
   • Exit if the trade doesn’t reach the target within 5-10 bars (depending on timeframe) to avoid stagnant positions.

Example Exit:

• Entered long at $100 breakout, targeting $110 resistance.
• Stop-loss at $98 (below recent swing low).
• Exit at $110 (reached resistance), or if RSI hits 75 with bearish divergence, or if price closes below 20-EMA with low volume.

5. Risk Management

• Position Sizing: Risk no more than 1-2% of account per trade, calculated based on stop-loss distance.
• Max Trades: Limit to 3-5 open positions to avoid overexposure.
• Avoid Choppy Markets: Skip trades if ADX (optional) is below 20, indicating a weak trend, or if BB width is narrow (low volatility).
• Backtest and Validate: Test the system on historical data (e.g., 6-12 months) to ensure profitability for your asset and timeframe.

6. Why This System Works

• High Probability: Combines trend (MA, MACD), momentum (RSI, MACD), volatility (BB), and conviction (Volume) to filter false signals and focus on strong breakouts at S/R levels.
• Complementary Indicators: MACD refines MA’s trend signals and RSI’s momentum, while BB identifies volatility-driven opportunities, ensuring all indicators align for robust setups.
• S/R Precision: Using short- and long-term S/R levels anchors entries/exits to high-probability price zones, improving timing and risk-reward ratios.
• Flexibility: Works across assets and timeframes, adaptable for trend-following or mean-reversion strategies.
• Consistency: Strict rules reduce subjectivity, and volume confirmation minimizes low-conviction trades.

7. Example Setup (Hypothetical)

• Asset: EUR/USD, 4-hour chart.
• Setup: Price approaches long-term support at 1.1000 (weekly low, 200-SMA).
• Indicators:
  • 20-EMA crosses above 50-EMA, both near 200-SMA (bullish alignment).
  • RSI at 35, rising with bullish divergence (price lower low, RSI higher low).
  • Volume spikes 40% above 20-period SMA on the bounce.
  • MACD line crosses above signal line, near zero.
  • Price touches lower BB at 1.1000, then breaks above 20-EMA.
• Entry: Buy at 1.1020 (close above 1.1000 with bullish engulfing candle).
• Stop-Loss: 1.0970 (below support and lower BB).
• Target: 1.1150 (next short-term resistance, 2:1 reward-to-risk).
• Exit: Close at 1.1150 or if RSI hits 70 with bearish divergence and MACD crosses below signal line.

8. Optimization Tips

• Backtesting: Use platforms like TradingView or MetaTrader to test on historical data, focusing on win rate (>60%) and risk-reward (>2:1).
• Market Conditions: Avoid trading during low-volume periods (e.g., holiday sessions) or major news events unless targeting volatility.
• Fine-Tuning:
  • Adjust MA periods (e.g., 10/30 for faster signals) or RSI levels (e.g., 40/60 for mean-reversion) based on asset volatility.
  • Experiment with BB deviations (e.g., 1.5 for crypto) for tighter signals.
• Confirmation: Add candlestick patterns or Fibonacci retracement levels to refine S/R zones for even higher probability.

9. Potential Weaknesses and Mitigation

• False Breakouts: Mitigated by requiring Volume and BB breakout confirmation.
• Whipsaws in Range Markets: Avoid trades when RSI oscillates around 50 and MACD is flat; use ADX (optional) to confirm trend strength.
• Overfitting: Stick to standard indicator settings and avoid over-optimizing for past data.
• Lagging Indicators: MA and MACD lag; rely on RSI divergence and BB for early reversal signals.

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Conclusion
The Trend-Momentum Breakout System leverages Moving Averages, RSI, Volume, MACD, and Bollinger Bands, with short- and long-term S/R levels, to deliver consistent, high-probability trading signals. It excels by aligning trend, momentum, volatility, and volume at key price levels, ensuring robust entries and exits. Backtest thoroughly, apply strict risk management, and adapt to your preferred asset and timeframe for optimal results. This system’s strength lies in its multi-indicator confirmation and S/R precision, making it a reliable framework for swing or positional trading.
Disclaimer: Grok is not a financial adviser; please consult one. Don't share information that can identify you.

Perhaps life is all about asking the right questions? AI has its limitations, but the opportunities for amazing insights just by asking some good questions seems almost unlimited now that it's here.

 

[Captain_Chaza]

Did you ask Claud?

 

[tech/a]

Hi Greggles

Just one observation.
This is a long only method and will perform as designed in a bullish market
In a choppy and bearish market it is likely to
Fail

I’d add a qualification that the index or instrument being traded satisfies a bullish longer term trend filter.

 

[greggles]

Hi Greggles

Just one observation.
This is a long only method and will perform as designed in a bullish market
In a choppy and bearish market it is likely to
Fail

I’d add a qualification that the index or instrument being traded satisfies a bullish longer term trend filter.

Thanks @tech/a - that's a very good point. The system is long only. Out of curiosity I have asked Grok to modify the system for bear markets and this is what was suggested.

To modify the Trend-Momentum Breakout System for trading in a bear market, we need to adjust the entry and exit rules to prioritize short-selling opportunities while maintaining the system's high-probability framework. The core components—Moving Averages (MA), Relative Strength Index (RSI), Volume, MACD, Bollinger Bands (BB), and short- and long-term support/resistance (S/R) levels—remain the same, but the conditions are inverted to capture downward trends and breakdowns in a bearish market environment. The modified system, still called the Trend-Momentum Breakout System (Bear Market), focuses on short trades (selling high, buying back lower) with robust confirmation for high-probability setups.
Below is the revised system tailored for bear market conditions, with changes to entry, exit, and context to align with downward price movements.

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Trend-Momentum Breakout System (Bear Market)
1. System Overview

• Objective: Identify high-probability short-selling opportunities in a bear market by combining trend-following (MA, MACD), momentum (RSI, MACD), volatility (BB), and volume confirmation at key short- and long-term S/R levels.
• Timeframe: Daily or 4-hour charts for swing trading (adjustable to 1-hour for shorter-term trades or weekly for longer-term).
• Assets: Stocks, forex, crypto, or indices with sufficient liquidity and bearish momentum (e.g., declining sectors or assets in a confirmed downtrend).
• Bear Market Context: Confirmed by price trading below the 200-SMA on a weekly chart, declining major indices (e.g., S&P 500), or macroeconomic indicators like rising interest rates or recession signals.

2. Indicator Settings

• Moving Averages:
  • Fast EMA: 20-period (short-term trend).
  • Slow EMA: 50-period (medium-term trend).
  • Long SMA: 200-period (long-term trend, aligns with long-term S/R).
• RSI: 14-period, with overbought (70), oversold (30), and centerline (50) levels.
• Volume: Raw volume with a 20-period SMA to gauge relative spikes; optionally use On-Balance Volume (OBV) for bearish trend confirmation.
• MACD: Standard 12, 26, 9 settings (fast EMA, slow EMA, signal line).
• Bollinger Bands: 20-period SMA, 2 standard deviations.
• Support/Resistance:
  • Short-term S/R: Identified via recent swing highs/lows on daily/4-hour charts (past 1-3 months).
  • Long-term S/R: Identified via major swing highs/lows on weekly/monthly charts (past 6-12 months) or psychological levels (e.g., round numbers like 1.2000 in forex).

3. Entry Rules (Short Trades)
A short trade is entered when all of the following conditions align at a short- or long-term S/R level, signaling a high-probability breakdown:

1. Trend Confirmation (MA):
   • Price is below the 20-EMA and 50-EMA, and the 20-EMA is below the 50-EMA (bearish trend).
   • Price is ideally below the 200-SMA, confirming a broader bear market, but pullbacks to the 200-SMA can be used for mean-reversion shorts at resistance.
2. Momentum (RSI):
   • RSI is below 50 (bearish momentum) but above 30 (not oversold) to avoid entering at exhaustion points.
   • RSI shows bearish divergence (price makes higher high, RSI makes lower high) at resistance for higher-probability setups.
3. Volume Confirmation:
   • Volume spikes above its 20-period SMA (or OBV declining) during a breakdown below support, confirming strong selling pressure.
   • Avoid entries on low volume (below 20-period SMA), as it suggests weak bearish conviction.
4. MACD Confirmation:
   • MACD line crosses below the signal line and is below zero (bearish momentum).
   • A widening histogram below zero strengthens the signal.
5. Bollinger Bands Context:
   • Price breaks below the lower BB during a breakdown at support, indicating strong bearish momentum.
   • Alternatively, price touches the upper BB at resistance (indicating overextension) before reversing downward for mean-reversion shorts.
6. S/R Trigger:
   • Price breaks and closes below a short- or long-term support level (or fails to break above resistance) on the chosen timeframe.
   • Use bearish candlestick patterns (e.g., bearish engulfing, shooting star at resistance) to confirm the breakdown or rejection.

Example Short Entry:

• Price breaks below a short-term support at $50 (recent swing low).
• 20-EMA is below 50-EMA, both below 200-SMA (bearish trend).
• RSI is at 45 (bearish, not oversold).
• Volume spikes 60% above its 20-period SMA on the breakdown.
• MACD line crosses below signal line, below zero.
• Price breaks below lower BB, confirming breakdown strength.
• Bearish engulfing candle forms at the $50 support break.

4. Exit Rules (Short Trades)
Exits are based on S/R levels, indicator signals, and risk management to lock in profits or limit losses:

1. Profit Target:
   • Exit at the next significant short- or long-term support level (e.g., if entering at $50 support breakdown, target $45, the next major support).
   • Alternatively, use a 2:1 or 3:1 reward-to-risk ratio based on stop-loss distance.
2. Stop-Loss:
   • Place above the most recent swing high or the broken support level (now resistance), typically 1-2% above the entry S/R level.
   • Ensure stop-loss is outside the 20-EMA or upper BB for added buffer.
3. Trailing Stop:
   • Trail using the 20-EMA (exit if price closes above it) or a fixed percentage (e.g., 2%) to lock in profits as the price declines.
4. Indicator-Based Exits:
   • Exit shorts if RSI enters oversold (<30) and shows bullish divergence (price lower low, RSI higher low), signaling potential reversal.
   • Exit if MACD crosses above the signal line or moves above zero, indicating weakening bearish momentum.
   • Exit if Volume drops significantly (below 20-period SMA) during the downtrend, suggesting fading selling pressure.
   • Exit if price moves back inside BB after a breakdown, indicating potential failure.
5. Time-Based Exit (Optional):
   • Exit if the trade doesn’t reach the target within 5-10 bars (depending on timeframe) to avoid holding stagnant positions.

Example Exit:

• Entered short at $50 breakdown, targeting $45 support.
• Stop-loss at $51.50 (above recent swing high).
• Exit at $45 (reached support), or if RSI hits 25 with bullish divergence, or if price closes above 20-EMA with low volume.

5. Risk Management

• Position Sizing: Risk no more than 1-2% of account per trade, calculated based on stop-loss distance.
• Max Trades: Limit to 3-5 open positions to avoid overexposure, especially in volatile bear markets.
• Avoid Overleveraging: Bear markets can be erratic; use conservative leverage (e.g., 2-5x in forex/crypto, none in stocks).
• Backtest and Validate: Test the system on historical bear market data (e.g., 2008, 2020 crashes) to ensure profitability for your asset and timeframe.
• Market Context: Confirm bear market conditions using weekly 200-SMA, declining ADX (optional), or macroeconomic signals (e.g., falling GDP, rising unemployment).

6. Key Modifications for Bear Market

• Inverted Signals:
  • Entry focus shifts to breakdowns below support (vs. breakouts above resistance in bull markets).
  • RSI and MACD prioritize bearish momentum (below 50, below zero) and bearish divergences at resistance.
  • BB emphasizes lower band breaks or upper band rejections for short entries.
• Trend Context:
  • Price below 200-SMA confirms a bear market, but pullbacks to 20-EMA or 50-EMA (acting as resistance) are prime shorting opportunities.
• S/R Role:
  • Support becomes a breakdown trigger (short entry), while resistance serves as a rejection point for mean-reversion shorts or stop-loss placement.
  • Long-term S/R (e.g., yearly lows) is critical for targeting exits, as bear markets often respect major support zones.
• Volume Sensitivity:
  • High volume on breakdowns is crucial, as bear markets can have panic-driven moves. Low-volume rallies are ideal for short entries at resistance.
• Volatility Adjustment:
  • Bear markets are volatile; BB’s 2 standard deviations help filter noise, but consider tightening to 1.5 deviations for hyper-volatile assets like crypto.

7. Example Setup (Hypothetical)

• Asset: S&P 500 Index (SPY ETF), Daily chart.
• Bear Market Context: Price below 200-SMA (4000), declining for 3 months amid rising rates.
• Setup: Price rallies to short-term resistance at 3800 (recent swing high, near 50-EMA).
• Indicators:
  • 20-EMA is below 50-EMA, both below 200-SMA (bearish trend).
  • RSI at 55, showing bearish divergence (price higher high, RSI lower high).
  • Volume spikes 50% above 20-period SMA on a breakdown below 3800.
  • MACD line crosses below signal line, below zero.
  • Price rejects upper BB at 3800, then breaks below 20-EMA with a bearish engulfing candle.
• Entry: Short at 3790 (close below 3800 resistance).
• Stop-Loss: 3820 (above resistance and recent swing high).
• Target: 3700 (next long-term support, 2.5:1 reward-to-risk).
• Exit: Close at 3700 or if RSI hits 25 with bullish divergence and MACD crosses above signal line.

8. Why This System Works in a Bear Market

• High Probability: Aligns bearish trend (MA, MACD), momentum (RSI, MACD), volatility (BB), and selling pressure (Volume) to capture breakdowns at S/R levels, filtering false rallies.
• Complementary Indicators: MACD refines bearish trend signals, BB identifies overextensions or breakdowns, and Volume confirms panic-driven moves typical in bear markets.
• S/R Precision: Short- and long-term S/R levels anchor entries at resistance rejections or support breakdowns, improving timing in volatile downtrends.
• Bear Market Adaptation: Inverts bull market signals to prioritize short-selling, leveraging bearish divergences and high-volume breakdowns for conviction.
• Consistency: Strict rules reduce subjectivity, ensuring trades align with the dominant bearish trend.

9. Optimization Tips

• Backtesting: Test on historical bear markets (e.g., 2008, 2020, 2022) using platforms like TradingView or MetaTrader, aiming for a win rate >60% and risk-reward >2:1.
• Market Conditions: Focus on high-volatility periods (e.g., VIX >20) and avoid low-volume countertrend rallies.
• Fine-Tuning:
  • Shorten MA periods (e.g., 10/30) for faster signals in sharp declines.
  • Adjust RSI to 40/60 for earlier entries in aggressive bear markets.
  • Tighten BB to 1.5 deviations for volatile assets.
• Confirmation: Add bearish candlestick patterns (e.g., evening star) or Fibonacci retracement (e.g., 61.8% pullback to resistance) to refine entries.
• Sector Selection: Target weak sectors (e.g., tech in 2022) or assets with poor fundamentals for higher-probability shorts.

10. Potential Weaknesses and Mitigation

• False Breakdowns: Mitigated by requiring Volume and BB lower-band breaks for confirmation.
• Countertrend Rallies: Bear markets have sharp rallies; avoid shorts when RSI is oversold (<30) or MACD shows bullish crossover. Use ADX (optional) to confirm downtrend strength (>20).
• Volatility Spikes: Bear markets can gap down; widen stop-losses slightly (e.g., 2-3%) or avoid trading during major news (e.g., Fed announcements).
• Lagging Indicators: MA and MACD lag; rely on RSI bearish divergence and BB upper-band rejections for early entry signals.

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Conclusion
The Trend-Momentum Breakout System (Bear Market) adapts the original system for short-selling in a bearish environment by focusing on breakdowns below support, bearish trend confirmation, and high-volume selling pressure. Using Moving Averages, RSI, Volume, MACD, and Bollinger Bands, with short- and long-term S/R levels, it delivers high-probability short trade signals. The system’s strength lies in its multi-indicator alignment and S/R precision, tailored to capture downward momentum in volatile bear markets. Backtest thoroughly, apply strict risk management, and focus on weak assets or sectors to maximize consistency and profitability.

Disclaimer: Grok is not a financial adviser; please consult one. Don't share information that can identify you.

I then asked Grok when should a trader switch from the bull market to bear market system and this is what i got back:

Switching from the Trend-Momentum Breakout System (Bull Market) to the Trend-Momentum Breakout System (Bear Market) requires clear evidence that the market has transitioned from a bullish to a bearish environment. This decision should be based on objective, multi-faceted criteria that confirm a sustained downtrend, as premature or incorrect switches can lead to misaligned trades and losses. Below are the key criteria to determine when a market is in a bear market and when to switch systems, combining technical, price-based, and broader market context indicators.

Criteria for Identifying a Bear Market and Switching Systems
A bear market is typically characterized by a sustained decline in asset prices, often accompanied by pessimism, weak fundamentals, and high volatility. To switch to the bear market system, use the following criteria, requiring at least three to align for confirmation to avoid false signals:

Price Below 200-Period SMA (Long-Term Trend):
Criterion: The price closes below the 200-period Simple Moving Average (SMA) on a weekly chart (or daily for shorter-term traders) and remains below it for at least 2-3 consecutive periods.

Why: The 200-SMA is a widely watched long-term trend indicator. A sustained break below it signals a shift from bullish to bearish market structure, often marking the start of a bear market.

Application: Monitor major indices (e.g., S&P 500, NASDAQ) or the specific asset class (e.g., BTC/USD for crypto). For example, if the S&P 500 weekly close is below its 200-SMA (e.g., 4000), it’s a strong bearish signal.

Threshold: Price must stay below the 200-SMA, with rallies failing to reclaim it (200-SMA acts as resistance).

20% Decline from Recent Highs (Price-Based Definition):
Criterion: The market or asset declines 20% or more from its most recent all-time or 52-week high, measured on a closing basis (daily or weekly).

Why: A 20% drop is a conventional threshold for defining a bear market, reflecting significant selling pressure and loss of bullish momentum.

Application: Calculate the percentage drop from the peak. For example, if the NASDAQ hits 16,000 and falls to 12,800 (20% decline), it confirms bear market conditions.

Threshold: The decline should be sustained (e.g., no immediate recovery above the -20% level within 1-2 weeks).

Bearish Moving Average Alignment:
Criterion: On the daily or weekly chart, the 20-EMA crosses below the 50-EMA, and both are below the 200-SMA, forming a bearish stack (20-EMA < 50-EMA < 200-SMA).

Why: This “death cross” (short-term MA crossing below long-term MA) and bearish alignment indicate a dominant downtrend, aligning with the system’s trend-following logic.

Application: Check the chart of the asset or index. For instance, if the 20-EMA crosses below the 50-EMA on the EUR/USD daily chart, with both below the 200-SMA, it signals a bearish trend.

Threshold: The bearish alignment should hold, with price repeatedly rejecting the 20-EMA or 50-EMA as resistance.

Weak Market Breadth:
Criterion: A significant number of stocks or assets within a market show bearish momentum, e.g., fewer than 30% of stocks in an index (like the S&P 500) trading above their 200-day SMA, or a high Advance/Decline (A/D) ratio skew toward decliners.

Why: Poor market breadth indicates broad-based selling, confirming a bear market beyond just index-level price action.

Application: Use tools like the NYSE A/D line or percentage of S&P 500 stocks above their 200-SMA (available on platforms like StockCharts or Bloomberg). A sharp decline in breadth (e.g., only 20% of stocks above 200-SMA) supports a bear market.

Threshold: Breadth remains weak for at least 2-3 weeks, with no significant recovery.

Macro or Fundamental Triggers:
Criterion: Presence of macroeconomic or fundamental factors associated with bear markets, such as:
Rising interest rates (e.g., Federal Reserve hiking rates).

Economic contraction (e.g., declining GDP, rising unemployment).

Geopolitical crises or systemic financial stress (e.g., banking sector weakness).

Sector-specific collapses (e.g., tech bubble bursting).

Why: Bear markets often coincide with deteriorating economic conditions or policy shifts, reinforcing technical signals.

Application: Monitor economic data releases (e.g., via Bloomberg, Reuters) or central bank announcements. For example, a Fed rate hike cycle starting in 2022, combined with GDP contraction, signaled a bear market.

Threshold: At least one major macro trigger (e.g., 2+ quarters of negative GDP growth) alongside technical signals.

Increased Volatility (VIX or Volatility Index):
Criterion: The CBOE Volatility Index (VIX) sustains above 20-25 for equities, or equivalent volatility metrics (e.g., implied volatility in forex/crypto) rise significantly.

Why: Bear markets are marked by heightened fear and uncertainty, reflected in elevated volatility. A VIX above 20 indicates defensive market behavior.

Application: Check VIX daily/weekly levels. A VIX consistently above 25, as seen in 2020 or 2022, supports a bear market environment.

Threshold: VIX remains elevated (>20) for 2+ weeks, with spikes during sell-offs.

When to Switch Systems
Switch from the bull market system to the bear market system when at least three of the above criteria are met, with Price Below 200-SMA or 20% Decline as a mandatory condition (one of these must be present). This ensures the switch is based on robust evidence of a bear market, avoiding premature shifts during corrections (e.g., 10-15% pullbacks in a bull market).
Example Decision Process:
Scenario: S&P 500 peaks at 4800 in January 2025, then falls to 3800 by April 2025.

Criteria Check:
Price Below 200-SMA: Weekly close at 3800 is below 200-SMA (4000) for 3 weeks, with rallies failing at 4000 (now resistance).

20% Decline: 3800 is a 20.8% drop from 4800, sustained for 2 weeks.

Bearish MA Alignment: 20-EMA crosses below 50-EMA on daily chart, both below 200-SMA.

Weak Breadth: Only 25% of S&P 500 stocks above their 200-SMA.

Macro Trigger: Fed raises rates to 5%, GDP growth negative for two quarters.

VIX: VIX at 28, sustained above 20 for a month.

Action: Five criteria met, including mandatory 20% decline. Switch to the bear market system immediately, focusing on short trades using the bear market rules (e.g., breakdowns below support, bearish MA alignment).

Additional Considerations
Confirmation Period: Wait for 2-3 periods (e.g., days on daily charts, weeks on weekly) to confirm criteria persistence, reducing false signals from short-term corrections.

Asset-Specific Context: For individual assets (e.g., stocks, crypto), ensure the broader market or sector is also bearish. For example, shorting Tesla in a bear market is safer if the NASDAQ is below its 200-SMA.

Reverting to Bull System: Switch back to the bull market system if:
Price closes above the 200-SMA for 2-3 weeks.

A 20%+ rally from recent lows occurs.

20-EMA crosses above 50-EMA, and both are above 200-SMA.

Market breadth improves (e.g., >50% of stocks above 200-SMA).

VIX drops below 15, and macro conditions stabilize (e.g., rate cuts, GDP growth).

Hybrid Approach (Optional): During transition periods (e.g., market testing 200-SMA), use a neutral strategy, trading both long and short setups cautiously, focusing on S/R breakouts/breakdowns with strict volume confirmation.

Practical Application
Monitor Indices: Track major indices (S&P 500, NASDAQ, Dow Jones) or asset-specific benchmarks (e.g., XBT/USD for crypto) weekly for 200-SMA breaks and 20% declines.

Tools: Use platforms like TradingView, MetaTrader, or Bloomberg to set alerts for 200-SMA breaks, MA crossovers, and VIX levels.

Backtest Transitions: Review historical bear market onsets (e.g., 2008, 2020, 2022) to validate criteria effectiveness for your assets.

Macro Calendar: Follow economic calendars (e.g., via Investing.com) for rate decisions, GDP releases, or geopolitical events that could trigger bear markets.

Conclusion
Switch to the Trend-Momentum Breakout System (Bear Market) when at least three criteria—Price Below 200-SMA, 20% Decline, Bearish MA Alignment, Weak Market Breadth, Macro Triggers, or Elevated VIX—are met, with either the 200-SMA break or 20% decline as a mandatory signal. This ensures a robust, evidence-based transition to a bearish trading strategy, aligning with the system’s focus on high-probability short trades. Regularly monitor technical and macro indicators, confirm signals over 2-3 periods, and revert to the bull system only when clear bullish criteria emerge.

Disclaimer: Grok is not a financial adviser; please consult one. Don't share information that can identify you.

AI is all about logic, so asking it about probabilities is one of its strengths. In its current form it is not able to backtest systems for you, but if you backtest it yourself and feed it the data it can suggest tweaks to strengthen and improve the system based on that information.

 

[tech/a]

Thanks @tech/a - that's a very good point. The system is long only. Out of curiosity I have asked Grok to modify the system for bear markets and this is what was suggested.



I then asked Grok when should a trader switch from the bull market to bear market system and this is what i got back:



AI is all about logic, so asking it about probabilities is one of its strengths. In its current form it is not able to backtest systems for you, but if you backtest it yourself and feed it the data it can suggest tweaks to strengthen and improve the system based on that information.

Much to say but quickly as I fly out the door

Reversing long systems in my experience while logical is not practical

Short side moves way faster and is shorter in timeframe ( Generally )
Short systems look very different to long systems
Swimming freestyle is very different to back stroke

Have you noticed that funds with buildings full of Analysts rarely achieve 10% plus here another dynamic comes into play Capital invested.
Gotta go !

 

[wayneL]

I would also point out that a great deal of the success of longer term trend trading systems are the occasional outliers, the multibag trades that we all hope happen.

The maximum possible profit from any short trade is 100% and only if the stock goes to nearly zero, which is extraordinarily rare... And you'll get short squeezes along the way.

Shorter term swing trading is a different beast altogether, but for systems such as the one described, you really want to be long only IMNTBCHO

 

[tech/a]

Much to say but quickly as I fly out the door

Now that I’m back

Long only systems look to remain in bullish conditions for as long as possible so
My exits are based up this premise. Here a a couple
(1) Trading below the 200 M/A —- 2 things if the index trades below it’s category eg mining
Then out regardless of the stock. I find I’m out of my portfolio or most of it before disaster.
With this exit
Regardless of method used to take a trade indexes and stocks must be trading about the 200 M/A
In my case EMA.
This exit tends to keep me in longer during whipsaws. Culling takes place within the confines of the system

(2) A real favourite
Only trade when a stock or index trades 20% above its most recent lowest low.
Sell only when the stock or index trades 20% below is most recent highest high.

Works really well in prolonged long trends and if you get a great prolonged bear run in your favourite stock makes a fantastic re entry if you take a look at FMG which I posted up a chart showing the method you’ll see what I mean
In while it’s bullish selling 20% from a significant high the buy back once there is a 20% rally from a significant low. You liquidate high and can buy back more stock with your sold $$ at the significant low.

Exit isn’t or shouldn’t be the reverse of an entry signal
To me Entries long are clear signs of renewed momentum
Then signs of continuation. I’ll also leave a trade that becomes trapped in a whipsaw scenario.
Eg locked between buy and 1R and my initial stop loss —— 10% of equity in the trade normally
1-1.5 of total capital .
Then exit is a clear sign that momentum has turned bearish.

Short trading is another animal. I like indexes for this and 1. - 4 hrs
But there are extremes like we have just seen with reasons that cannot be denied
( The shock of tariffs ) where fortunes could be made in a week.
They do happen. Got a bit but nothing like I should have !!

 

[tech/a]

Works really well in prolonged long trends and if you get a great prolonged bear run in your favourite stock makes a fantastic re entry if you take a look at FMG which I posted up a chart showing the method you’ll see what I mean
In while it’s bullish selling 20% from a significant high the buy back once there is a 20% rally from a significant low. You liquidate high and can buy back more stock with your sold $$ at the

Post in thread 'FMG - Fortescue Ltd'
https://www.aussiestockforums.com/threads/fmg-fortescue-ltd.1935/post-1140550


While it was a chart marked up in hind site I will mark up a chart at some time going forward
I’m sure it will show more confirmation.

Not that I’m trying say that buy and hold is wrong
I think there are better ways to maximise investment

Just showing one I know that has been published in Radge’s
“ Un Holy Grails “

 

[tech/a]

Apologies
My input appears to have stifled the thread
Was not my intention . I just wanted to add food for thought.

 

[divs4ever]

and here i was thinking we were all sitting back watching how the systems navigate the current up trend , judge/tweak from any lessons learned

ie were they on the ball , a tad late , or completely misjudged the the trend ( if the signals conflict with the actual markets )