Cumulative Delta Classification Examples
The purpose of this section is to add a resource to understand what classification means using examples from current charts.
This page will be updated with current examples that appear interesting. The idea is to understand the big picture of what the chart was telling us. Its not about just seeing green or red. You will see these often and that is easy to read. But the idea on this page is to understand everything that is being shown to us.
The idea is to be objective in these classifications.
The discussion about a particular pattern is solely an opinion and is not trading advice. What users should be doing is developing and testing a trading plan with this information. So with that being said, let us look at a few examples.
What Is Optimal?
This is pretty easy to assess. He have higher highs and higher lows in the cumulative delta (The KP3 number). Preceding the trade we had a double green classification because the low to the high (KP2 number) was also very high. Then note the KP3 number (4623) from the previous low. That is a lot of contracts. In addition, at the location of the trade, we had a divergence signal, which told us that large lot traders were buyers on the way down. There is nothing here giving us a warning.
All Green Setup
Here is a great setup using all of the ZoneTraderPro tools. First leading into the trade the divergence indicator is telling us the contract is under accumulation. Then we have extremely strong buying (KP2 = 2959) by large lot traders (orders >25) into the trend trade setup. Then as price fell, the large lot traders were buyers (KP2 = 1265) giving is the ZoneTraderPro Special Divergence signal. That is truly an amazing setup. Additionally the KP2 ratio was 115, indicating that they were also accumulating contracts using limit orders also. This explains why the strong trend was so strong.
KP2 Ratio is Important
The KP2 Ratio is important. In the lead up to the short trade, we have double black markers because the KP2 Ratio has been exceeded each time.
This is why the KP2 ratio is important. The KP2 ratio is a reflection of the limit orders of the sellers. This is completely different from order flow. Order flow is looking at market orders. Now we have a way to look at limit orders. So this KP2 Ratio becomes as important as order flow.
So going into the short trade, we have a cause for a concern. The concern is that we have a strong KP2 ratio and Accumulation divergence going long directly before the short trade. Accumulation divergence is the absorption of contracts based on market orders. Then we have limit order accumulation of contracts. Now here is why the classification system also classifies divergence. Are those 2778 contracts right or wrong? We don’t know in real time, so we need to look at both sides and the complete picture. In this case, there was a very large KP2 number, meaning a lot contracts were being absorbed.
My opinion is that because of the previous two short black markers (the big picture) combined with the real time numbers at the trade, we have a very high probability for the short trade. If we did not have the two black short markers, the long accumulation would have been considered a high probability trade.
OK, because KP2 ratios are important, we have two excellent examples why. The first is a long trade that had a KP2 ratio in a strong trend of 111. Then we have strong buying into the short trend trade giving us a green KP2 marker and telling us we are developing a broken reversal long pattern. Now we trade down into the broken reversal pattern and we miss getting a green marker by just 16 contracts, but my opinion is that this is a high probability trading pattern and we would avoid the trend short trade.
Next we see a trend long trade that fails. And the KP2 Ratio was a black marker preceding the trade and in real time you may have had a red KP2 marker on heavy selling.
That sets up an optimal reversal short trade. What makes this an optimal trade? You might be confused because there is a previous green KP3 marker and a current KP2 green marker and only one previous red KP2 marker. But we have a KP2 Ratio marker at the trade and that means a huge number of contracts were being absorbed and sold short and there was a previous KP2 Ratio short marker.
Leading into that example above, we had 3 consecutive short trend trades. The first two trades have exactly the same patterns and thus the same commentary. We are concerned on the sell off that we have a KP2 Ratio markers. However the buying on the pullbacks into the trend trades (KP2 number) are very weak. So because of the weak buying, these are good short examples.
The third trade is again a very good pattern, but it is forecasting the end of the strong bearish trend. It’s the first time we strong KP2 buying, but the sellers come in with limit orders and force it down one more time. So again, my opinion is the KP2 Ratio outweighs the strong KP2 number because the sellers were able to absorb contracts at a high ratio.
Then we see another black marker at the low and the buyers come back in, but this time there is no HP2 Ratio resistance. Now we have a reason to stop shorting.
Here we have two trades that involve divergences. The 1st label on the chart is that we are in a strong trend reversal, so we would expect to see the strong trend continue from minor resistance. Price instead traded through the intermediate resistance zone, setting up a long broken reversal. Should we have taken the short trend trade? No. You had a combination of the KP2 Ratio black marker and the setup of the broken reversal pattern. Then we have an excellent long broken reversal setup. It is excellent because we have both market order accumulation and a limit order KP2 Ratio accumulation.
Next we have an excellent short exhaustion trade. Again because we have a black KP2 ratio giving us limit order distribution. You may notice a pattern here. I am giving more consideration to the black KP2 Ratio marker than the red / green KP markers. This is a decision you must make based on experience and back testing.
Then we have a short trend trade that was again a very good trade. This time we had a market order distribution signal, but no red KP markers. This is not optimal, but what gives this a very good rating is the resistance you get from the exhaustion pattern (a trend reversal pattern) with the previous KP2 Ratio marker.
Then there is a short trend trade with divergence. Going into the trade we are concerned because of the KP2 Ratio support, but there is nothing else keeping us out of the trade. After entry into the trade, price traded 7 ticks higher from the entry giving us a regular divergence pattern, that works. I can’t say that this trade entry is great, but it wasn’t a bad trade because of the KP3, and in real time I would have been looking to take the trade based on the information.
Here is my point when I say I have a concern because of the KP2 Ratio support. Again you need to do your own back testing. Based on this back testing, you might consider a tighter stop. But you need to prove out the idea before you trade it.
Now here is something really unique that occurred on 10/22/19. Notice how every time price traded down, we received a black KP2 Ratio marker. Again there was some great trades here, especially involving the accumulation and distribution divergences. Notice how we got our first black short marker 1344 hours. Was that important? Could be.
This looks like a huge consolidation pattern.