POC Extension Strategy
POC Extension Order Flow Strategy
The POC Extension Trade is considered the strongest order flow pattern. This is because multiple things are happening in the order flow that would suggest a reversal.
So when we take off the noise from the other signals and only apply the POC Extension, Extension Zones, POC Absorption, and ZTP Delta Strength indicator, we see the basis for a powerful strategy.
What is unique about ZTP Extension Zones are that once they begin to be created in a certain direction, it is very common that they continue to be created in the same trading direction. The reversal is signaled by an opposing extension zone.
The ZTP Extension Zones are created by an imbalance in market orders. The zone then extends to the right of the chart until that price level is broken by price trading through and closing through the Extension Zone. You will also see a darker color of green or red. This occurs when a historical zone is stacked upon a current zone. In other words, what is happening is that they are coming back in and supporting the previous price.
It is estimated that in about 80% of the trading reversals, an Extension Zone is created one tick from a high or one tick from a low. This makes sense. Algorithms are what drive a market. When price discovery reaches some kind or support or resistance, the computers start trading the opposite direction, and they do it on market orders. This is also seen in divergence patterns and can be used as an entry trigger.
Executing the Strategy
The idea behind the strategy to enter a trade is fairly simple. We have a POC Extension Order Flow signal at a high or low. We usually don’t want signals that occur after a high or low. An exception to this may be when a high or low is created without an POC Extension signal. Price trades away but comes back in a test. Then our POC Extension signal is given.
After the trade is entered, we watch the Point of Control on each bar. We want to see a rising POC on subsequent bars. If we have a bar that trades in the opposite direction, we can be concerned but not necessarily pull the trade. We want to see what the next bar does. If the next bar resumes the trend, then we continue in the trade. It is not going to matter if we have a lower POC. That is expected that we would have a lower POC because of the previous counter trend bar.
So in the example on the right, we were long and we had a reversal bar on low volume. This is why the Delta Strength indicator is on the chart. First the indicator is telling us the selling strength was a weak 87. But the circle is colored brown because it is on low volume. What is this order flow telling us? The buyers pulled limit order support, allowed price to fall, and received better prices. The trend resumed and the Delta Strength increased on high volume, as the buyers came back with market orders and lifted price. The Delta Strength was 351 and colored blue. Blue indicates that the volume was between 140% to 175% above normal, another good sign for trend resumption. When you see a black circle, that is indicating volume is above 175% of normal.
POC Absorption Signal
OK now you are in a trade and you see a POC Absorption order flow signal come up. What do you do? The POC Absorption is placed there for a reason. It is not a good sign for your long trade in this example. Sellers came in on limit orders and stopped the buyers. For the next 5 bars, price traded sideways, with no clear signals, one way or another.
Then on the 6th bar, buyers came in and formed another POC Extension long trading signal. Price traded another 5 points higher after this consolidation was broken. This could be another instance where re-entering a trade make sense when not at a high or low.
Why not use the POC Absorption as an entry signal? You could so long as you go back, and back test the idea. Just as you should back test that the POC Absorption is a valid reason to exit a trade. But I have chosen not to for the following reason. When an absorption occurs, limit orders are being used to stop the current price trend. That is all good, until the buyer or seller has had all of his orders filled. Market orders are not being used to force a market reversal as in the POC Extension pattern.
Having A Trading Plan
Just like everything else you do when trading, it should be focused around a written trading strategy. A strategy spells out 3 separate and distinct parts of a trade.
- Trade entry
- Management of the trade
- Trade exit
For the management of the trade we need to consider where to place our stop. You already know where the support occurs based on the extension zone that was created. But here again, you need to go back test your idea. ZoneTraderPro makes this very easy, because nothing disappears from a chart once a bar is complete. So it is very easy to go and load up 6 months worth of data and back this idea. ZoneTraderPro can not tell you where to place your stop. This is your job based upon readily available information
The management of the trade also includes monitoring the point of control. Is the POC moving in our favor when we have a bars printing in the direction of our trade? In other words, when we are long, does the POC move higher when we have an up bar?
The last consideration is the trade exit. Here there are three ideas.
- Fixed profit target based upon research
- Opposite signal, including POC Absorption
- Using the POC to exit a trade.
The first idea of using a fixed target is the easiest to test. We would simply go back in the historical charts and build an excel worksheet, such as the worksheet created for the Classification Strategy.
At the same time we can be collecting data on the other 2 trade exit ideas. How do you develop an exit target? This is extremely easy and is illustrated in one of the Classification Strategy videos. That video is at the bottom of this webpage.
Do Not Trade in a Vacuum
This point is SO important. Look at the picture above where we had the Absorption signal potentially stopping us out of the trade. Use all the tools that ZoneTraderPro provides.
Here is the price patterns chart showing divergences. At the location of the 1st trade, we have a standard ZoneTraderPro reversal pattern with accumulation divergence. Additionally there is limit order accumulation of 116 contracts per tick. That is a trade with significant things going for it.
Then we see a NO SUPPLY divergence long signal occurring after the POC Absorption. This is a continuation signal in the original direction of the trend. Taking it (if we exited based on the POC Absorption) made us a strong hand for the consolidation that would occur after the next 6 order flow bars. Price would never come back to test our re-entry.
This point is SO important. On the chart on the right we see a great short trade, a POC long Extension that loses, and a second pair of POC Extensions that lead to a great long trade.
The POC long Extension that loses develops in the middle of no where, between two areas of support. The 2 POC Extensions that occur at the bottom occur at counter trend support (The blue zone) making that a legitimate trading pattern.
What should be done is to analyze where and chart where a trade is initiated from. These are questions that should be asked and answered when making a trading plan.
- Is it at a support or resistance zone?
- Is it part of a known trading pattern?
- Is there divergence on the main chart?
BloodHound and BlackBird Compatible
One question that is asked a lot is can these strategies be auto-traded using BloodHound and BlackBird.
This strategy idea comes the closest to a yes answer. However, I would strongly suggest that it be semi auto-traded. What does that mean? Semi auto-traded means that we don’t give up full control to BlackBird which may require some (possibly complex) exit rules.
When we are trading you will see on the order flow chart the POC Extension signal being given. But the bar is incomplete so the signal is not valid. When the bar is complete, that is when the BloodHound signal is generated and a trade can be sent to BlackBird. BlackBird has the ability to allow only a short trade or only a long trade to fire. So when you see the developing trade, if you don’t have red flags, then you permit the trade.
You don’t need to make a complex BloodHound rule to look for highs or lows and only take a counter signal with this semi auto-trade idea.
In the above example we have 5 consecutive winners. There was one long trade that did not at a high or low. Yes it would be possible to create a BloodHound rule that would eliminate that signal so we don’t go long at a high. BloodHound has the functionality built in. But would it not be easier just to be sitting back in your chair, keep your hands off the mouse and just be sitting on your hands?
Also you have the ability to control the stop and target without complex BlackBird programming. In other words, you can think faster and respond better to developing conditions than BlackBird.
Many people however have a job and want to be able to just monitor the computer. If that is the case in your situation, then absolutely you can take some time and develop good rules. You may not (or you may) squeeze out every possible tick, but at the end of the day if the strategy is green, then that is a good day.
The BloodHound logic rules on the left are all that were required to generate the above trades.
It should be noted that copies of the POC Extension solver were made. This was done to incorporate different and stronger requirements for a POC Extension signal. This is how you develop a trading plan to optimize the settings. What was changed was the minimum number of contracts and the minimum required delta.
But this is an idea that should be thoroughly tested before committing to a strategy. Do you know if the original settings were better? Maybe the settings need to be strengthened further. The great thing about BloodHound is I can generate 4 different settings, and test the different idea in just minutes. MINUTES. It doesn’t take days like before.
It would also be very simple to see if the POC Absorption signal is a good answer for an exit.
POC Extension Strategy Videos
Using Order Flow to Hit A Grand Slam
In this video we examine a new technique using order flow to get larger winning trades.
Creating a Profit Target
In this video we look at what it takes to get some data about a profit target.