Classification Strategy Statistics

The Classification System Strategy is a very powerful tool because it leverages all four of the ZoneTraderPro tools working together.  Those tools are the price patterns, order flow patterns, divergence patterns, and the cumulative delta values.

These tools are valuable because they can be back tested to develop a trading strategy.  ZoneTraderPro does not have indicators that disappear or redraw, so that a static chart shows the same information as a live chart. 

This statement does not apply to the live numbers of the KP2 and KP3.  Until a new zigzag is created, the live numbers can update based on new trades.  Once a new zigzag is created, then the numbers are permanent.

All Green Setup

The Methodology of Collecting the Statistics

The information on this page does not constitute trading advice and is not a complete strategy.  The information on this page analyzes the entry criteria for the ZoneTraderPro Trend Trade.  It does not analyze the management of the trade or the trade exit.  This includes both the stop and target.

The ZoneTraderPro Divergence indicator provides information from the cumulative delta.  The information is the KP2, KP3, and the KP2 Ratio.  The KP2 measures the high to a low or a low to a high.  The KP3 measures the high to the high or the low to a low.  The KP2 ratio is the density of the contracts in the KP2 leg.

In the example on the right, the KP2 is when price trades lower into the green intermediate support zone and the value is -347.  The KP3 is the low to the low value and is 845.  The KP2 ratio is -347 divided by 9 ticks and that gives us a density of -38 contracts per tick.

The classification system works because it is taking into account the state of the cumulative delta, which is being filtered for large lot orders.  Other software can only pick up the size of a fill.  The divergence indicator is picking up the size of the order.  This is unique to ZoneTraderPro.

KP2 example
worksheet

The information being collected is as follows

  1. Date
  2. Time
  3. MAE – The MAE is the Maximum Adverse Excursion.  The MAE is measured from the beginning of the zone where the trade occurs.  In the long trade example above, the price touched the top of the zone, so the MAE was exactly 0.
  4. LONG or SHORT
  5. WIN or LOSS – A win is the amount of ticks that occurred in the current zigzag.  A loss is defined as 8 ticks or more MAE.
  6. Previous KP2 – An X denotes that the number was in the direction of our trade and a O denotes it was going against the direction of the trade in the previous move.  In the example above, the KP2 was 1192, which was just 8 contracts from the setting required for a green classification bar.
  7. Previous KP3 – An X denotes that the number was in the direction of our trade and a O denotes it was going against the direction of the trade in the previous move. In the example above the KP3 was a very strong 1453, and this gives us the green classification bar at the high.
  8. Previous KP2 Ratio – This is the value of the KP2 Ratio in the previous move.  In the example above, the number was 85.
  9. Previous Divergence – Identifies if there was divergence leading into the trade.  This is a standard divergence.
  10. Current KP2 – An X denotes that the number was in the direction of our trade and a O denotes it was going against the direction of the trade in the current trade.  It is very unusual to have this in our favor.  It only occurs when there is special divergence.
  11. Current KP3 – An X denotes that the number was in the direction of our trade and a O denotes it was going against the direction of the trade in the previous move. In the example above, the value was 845, which gave us a green classification bar.
  12. Current KP2 Ratio – This is the value of the KP2 Ratio going into the trade.  In the example above, the number was -38.
  13. Current Divergence – Identifies if there was accumulation divergence, distribution divergence, or special divergence.
  14. Broken Reversal – Identifies if we are trading into a broken reversal pattern.
  15. Exhaustion – Identifies if an exhaustion trade preceded the trend trade.

What Generates a Trade?

BloodHound Logic

The price patterns and order flow patterns are compliant with SharkIndicators BloodHound Indicator.  The logic for the trades are pretty simple.  If we have a trend trade pattern, and we have any 1 of 11 order flow patterns, then we generate a trade.

Having BloodHound greatly reduced the amount of time necessary to generate the data.  Also, and even more important, is that the parameters can be slightly changed.  Then using BloodHound we can see the changes and put them into the database in just a short amount of time.

Here is an example.  I included two order flow patterns based on a 3 range chart pattern.  These were the ZTP Order Flow and Exhaustion.  As the data was being collected, I noticed that several losses occurred when we only had these smaller range patterns.  So it is a very easy test to take out these patterns and review the trading losses.  If the number is significant, then all of the winning trades need to be examined to determine the exact numbers.  I am also currently testing whether a stronger order flow pattern results in better trades.

Using BloodHound this is very easy to do and important information can be developed in a very short period of time.

ZoneTraderPro provides the logic templates that you see above for BloodHound free of charge.

Discussion of the Parameters

ZigZag Distance and Stop

The most important parameter is the ZigZag distance which determines a winning trade.  The ZigZag parameter was started at 9 ticks.  The purpose of this statistical analysis is to collect data.  It is not to create a trading plan from using exactly these numbers.  We now have a baseline to test other ideas and develop a plan based on that information. 

So a 9 tick ZigZag is the definition of a win.  But if you had a 9 tick target, then that didn’t necessarily result in a win.  Why?  Because you needed order flow to verify the entry.  If it took 5 ticks before you could enter, then your favorable excursion was only 4 ticks.  But if you see a statistic that says 83% win rate, you know that you are being placed on the right side of the trade was 83%.

Now it is very easy to change the ZigZag to 10 and in just a short amount of time you can have more information.

The stop was set at 2 points from the beginning of the zone.  Again this was done to collect data and see if there were parameters that could be identified that create a trading plan and collect data.

For example, there are 655 trades in the original database. 265 had 0 or 1 tick of adverse excursion.  That is 40%.  Only 43 winning trades, or 6%, went to 6-7 ticks of adverse excursion.

Broken Reversal

Broken Reversal Pattern

The Broken Reversal Pattern occurs after a strong trend trade does not respond as expected.  In a strong trend we expect to see the strong trend resume at the minor support / resistance zone.  If it trades to the intermediate zone, and gives us a trend trade, then the strong trend has been broken, and we can expect to see a reversal.  So why take a trend trade in the direction of the strong trend, if we have a pattern telling us price is reversing.

Two things can happen when taking the trend trade if we are in a broken reversal setup.  The first thing is that you have information that the trend is reversing and this will increase the chances of a loss.

The second factor, and probably more important is that the trend trade can only get 9-10 ticks of profit.  With the zigzag set at 9, these are the trades we want to eliminate.

The profitable trade becomes the Broken Reversal Pattern.

Normal Strong Trend Pattern

Strong Trend Pattern

Broken Reversal Pattern

Broken Reversal Pattern

Exhaustion Pattern

The Exhaustion Pattern

The Exhaustion Pattern occurs when you have a reversal from a minor area of support and resistance.  The exhaustion pattern is a reversal pattern.  When I first created the exhaustion pattern, I called the trend trade that followed a high risk trend trade, because of the propensity of these trend trades to fail.

So it is important to see if the Exhaustion Pattern affects the trend trade statistics.

Exhaustion Pattern

KP2 KP3 and KP2 Ratio

In order to get a green or red classification bar, we have to set the number of contracts in the Divergence indicators settings.  These are not automatically determined.  This is because you can use a different zigzag settings and then you would change the indicator values. 

The values used for this test was 500 for KP2 and 1200 for KP3.  If you created a test with a bigger zigzag, these numbers would need to increase. 

There are two important considerations here.  The first is that the numbers being displayed are based on trade order size of 25 or more.  Should all contracts be considered for the KP2 and the KP3 is a valid question.

The second consideration is actual numbers (500 and 1200) themselves.  These are not based upon a statistical analysis right now.  It was only recorded that the value exceeded the presets.  It makes a lot of sense to go back into the historical record and record the exact numbers and do a statistical analysis.

Losing Trades

Getting Data for Losing Trades

When we see the losing trade on the right, we do not see any KP data information at the location where we would have been taking the trade.  This was the hardest part of this analysis. In order to obtain this information, the market replay connection had to be used.  So using the market replay connection, the time was advanced until BloodHound told us we had a trade entry.  The time was then stopped and the numbers were pulled from the charts.

This was time consuming and the hardest part of the exercise.

Exhaustion Pattern

Conclusions

There is a lot of information on this page about how I gathered this data.  I have tried to be as clear and transparent as possible so that you can use these numbers to develop strategies and expand the use of the data.  I already have 3 ideas to use and collect additional data points. 

The point of this data is to create a starting point for developing a trading strategy and not just trade a red or green arrow.  A lot of the hard work has been done.  If there is a data point that you want to test, it can be tested fairly rapidly.

 

The Excel worksheet is available for you to use and manipulate.  I have locked the 1st worksheet which is the raw data.

If something is not clear on this page, feel free to send me an email and ask.  I will address the question and change this page if something needs additional explaining.

Close Menu