Linda Bradford Raschke and Laurence Connors
The 80-20 reversal: buying the failed break of an exhausted day's low
A day that opens in the top fifth of its range and closes in the bottom fifth looks unstoppable, and Steve Moore's range studies found it mostly is not: the selling follows through the next morning, but only about half of such days close beyond it. Raschke and Connors built the 80-20 setup on that statistic — wait for the morning break of the low, buy it when it fails and recovers, and take the snap-back. The trade is over in a day or two, and the time limit is as much a rule as the entry.
- Style
- Mean reversion
- Approach
- Mechanical
- Difficulty
- Intermediate
- Horizon
- Swing (days to weeks)
- Holding period
- One to two days
- Time needed
- 15 minutes after the close, plus the morning of the trade
- Markets
- Index futures · Index ETFs · Liquid large caps
- Source
- Street Smarts: High Probability Short-Term Trading Strategies — Linda Bradford Raschke and Laurence Connors
The rule set
- Setup: yesterday opened in the top 20% of its range and closed in the bottom 20%
- Trigger: today price trades below yesterday's low, then recovers back above it
- Enter on the recovery; the original enters intraday as the reversal happens
- Stop goes just beyond the failed low (about 2% in the daily proxy)
- The trade is over within a day or two — this is a Taylor-style short swing, not a position
What makes it distinctive
- Built on published research: Steve Moore found that full-range days follow through in the morning but close beyond it only about half the time
- The failure test gives a natural stop — just beyond the low that failed
- One setup, one trigger, one or two days in the trade
When it works
Liquid markets that mean-revert after emotional full-range days — index futures and big ETFs more than thin single names. The undercut flushes the stops, the recovery proves the sellers are spent, and the snap-back does the rest.
When it fails
In a genuine downtrend the undercut does not recover and the setup keeps you buying weakness. The daily-bar version confirms at the close, half a day later than the book's intraday entry, giving back part of the edge.
How a decision moves through it
Input
Daily bars
Open, high, low and close — the setup is entirely about where the open and close sit inside the day's travel.
Measure
The open's and close's position in the day's range
Each expressed as a fraction of the high-low range: zero at the low, one at the high. Two numbers per day, and the whole setup reads off them.
Decide
Yesterday was an 80-20 down day
Yesterday's open sat at or above 0.8 of its range and its close at or below 0.2 — a full-range trend-down day, open near the top, close near the bottom.
Decide
Today undercuts the low, then recovers
Today trades below yesterday's low but closes back above it — the failure test Street Smarts buys. The book enters intraday as the reversal happens; on daily bars the recovery is confirmed at the close, about half a day later.
Size & protect
Stop beyond the failed low
The published version carries a 2% stop as a proxy for the book's stop just beyond yesterday's low. If the market goes back below the level that just failed, the failure test itself has failed.
Act
Buy the recovery, out within two bars
A Taylor-style trade is over within a day or two. The book trails a stop intraday; the daily proxy substitutes a hard time exit.
Taylor's rhythm, Moore's numbers, Raschke's trigger
The setup has an unusually traceable pedigree. George Taylor's Taylor Trading Technique, from the 1950s, argued that markets move in a short buying-and-selling rhythm and that most moves are spent within a day or two. Steve Moore's range studies put numbers on one piece of it: days that open in the top 20% of their range and close in the bottom 20% — maximum-conviction trend days — show follow-through the next morning, but close beyond that morning extreme only about half the time.
Raschke and Connors' contribution in Street Smarts was the trigger. A coin-flip statistic is not a trade; a failure test is. Rather than fading the close of the big down day, the 80-20 waits for the next morning's break below the low — the follow-through Moore documented — and buys only when that break fails and price recovers the level. The trade is not a bet that the selling was overdone; it is a bet placed after the market has demonstrated it.
That ordering — let the break happen, then trade its failure — is the same logic the library's other failed-breakout systems use, applied to a single day's low instead of a multi-week channel.
What an 80-20 day is, and why its low is fragile
Open in the top fifth, close in the bottom fifth: the market sold off essentially all session. A day like that leaves a specific residue. Longs who held to the close are demoralised, with stops resting just under the low. Shorts are heavy with profits and looking for the exit. Everyone watching expects more of the same tomorrow.
The next morning's undercut serves both crowds — it triggers the resting stops and gives the shorts their fill to cover into. If genuine new selling exists, the market keeps falling and no trade occurs. If it does not, the flush was the last supply, and the recovery back above the low is the visible evidence: everyone who was going to sell has sold.
A trade with a price stop and a clock
The position is bounded on both axes. In price: just beyond the low that failed, because a market trading back below it has un-proven the thing the entry was proof of. In time: one to two days, because a Taylor-style reaction is spent that fast, and whatever remains after it is not what was bought.
Of the two, the clock is the rule that gets broken. The stop enforces itself; the time exit has to be enforced by the trader, on a position that often looks healthy at the deadline. Every module below returns to this, because it is where the system actually lives or dies.
Five ways into this system
- The 80-20 day, the undercut, and the recovery that makes it a tradeTwo conditions on yesterday's bar, one trigger on today's, and an exit that arrives by calendar if price never forces one.7 min read
- Sizing a countertrend trade that is bounded in price and in timeThe stop is close and the hold is short, which makes the risk unusually well-boxed — provided the stop is given room to clear the spike it sits behind.6 min read
- Markets that snap back, and the schedule the trade actually demandsThe setup wants markets where a full-range day is an emotional event rather than new information — which is a description of indices, and a warning about single stocks.5 min read
- The undercut that keeps going, and the trade that overstays its two daysThe mechanical failures are priced into the setup. The expensive failure is the one the rules already forbid: staying in the trade after the reaction it was built to catch is over.6 min read
- The 80-20 setup for beginners: reading one bar, and buying a break that failedOne bar to read, one level to watch, and a finished trade two days later — plus the least intuitive idea in short-term trading: a break that fails is information.6 min read
The ideas behind it
This system assumes you already know these. Each one is explained from scratch in Investing 101.
Compare with
- Turtle Soup Failed BreakoutWhen price breaks a 20-day low and closes back above it, the breakout has failed — buy the recovery with a stop just under the low, and be out within days.
- Holy Grail Setup (Raschke)When ADX confirms a strong trend, buy the first pullback to the 20-period moving average and target the prior swing high.
These are documented methods described for study. Nothing here is investment advice, a recommendation, or a claim about future returns — every system on this page has losing periods, and the pages say where.
Reading about a system is not having one.
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