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Component:Probability Zone

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Probability Zone Analysis

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Purpose

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"Where is price in the range & what are the odds of continuation?"

  1. Divides price range into halves and thirds
  2. Calculates continuation probability based on zone
  3. Detects Three-Finger Spread (profit-taking pressure)
  4. Identifies crash bars (structural breaks)
  5. Filters signals based on zone probability

Trading Market Principle

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"Trade with the odds. Top third after pullback = 80% continuation. Bottom third = 15%."

  • Price in top third = high probability of new high (80%) → favor LONG
  • Price in bottom third = low probability of new high (15%) → favor SHORT
  • Three-finger spread = profit-taking imminent → avoid new positions
  • Crash bar = structural break → short the bounce
  • Sideways market = mean reversion → opposite logic applies

The Asymmetric Probability Edge

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When odds are low on one outcome, the opposite side usually carries high odds:

  • If new high probability drops to 15%, then 85% odds favor reversal
  • We position ourselves on the high-probability side

Probability Zones

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Divide recent swing range into zones: 

    ┌───────────────────────────────────────┐ ← Swing High
    │                                       │
    │         TOP THIRD (80%)               │ ← 80% continuation probability
    │     (Above 66% of range)            │
    ├───────────────────────────────────────┤
    │                                       │
    │         TOP HALF (65%)                │ ← 65% continuation probability
    │     (50% - 66% of range)            │
    ├───────────────────────────────────────┤ ← 50% Line
    │                                       │
    │         BOTTOM HALF (35%)             │ ← 35% continuation probability
    │     (33% - 50% of range)            │
    ├───────────────────────────────────────┤
    │                                       │
    │         BOTTOM THIRD (15%)            │ ← Only 15% continuation (85% DOWN)
    │     (Below 33% of range)            │
    │                                       │
    └───────────────────────────────────────┘ ← Swing Low
Zone Range Position Continuation Prob Trading Implication
Top Third ≥ 66% 80% Strong LONG zone after pullback
Top Half 50% - 66% 65% OK for LONG with confirmation
Bottom Half 33% - 50% 35% Cautious LONG, watch for confirmation
Bottom Third < 33% 15% Avoid LONG (85% chance of lower)

Three-Finger Spread

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Detects large separation between Price, 21 MA, and 200 MA: 

BULLISH THREE-FINGER SPREAD:
    Price >> 21 MA >> 200 MA (large gaps)

    Interpretation:
    - Many traders with unrealized profits
    - Any red bar can trigger mass profit-taking
    - Creates fast, violent declines
    - AVOID LONGS in this condition

BEARISH THREE-FINGER SPREAD:
    Price << 21 MA << 200 MA (large gaps)

    Interpretation:
    - Many traders with unrealized losses
    - Potential for short squeeze
    - AVOID SHORTS in this condition

Detection Threshold: 2% minimum spread between each level

Crash Bar Detection

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Identifies structural breaks (crash bars): 

Crash Bar Criteria:
    1. Range ≥ 2× average range of prior 10 bars
    2. Close near extreme (within 30% of high/low)
    3. Fast, violent, elongated movement

IF crash bar detected:
    - Block LONG signals
    - Allow SHORT signals with 1.5x strength
   

Post-Crash (within 5 bars):
    - Bounce to top zone = prime SHORT entry
    - Block LONG signals

Pullback Classification

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Classifies pullbacks as healthy or collapse:

Type Criteria Trading Action
HEALTHY_PULLBACK ≤ 50% retracement, 45-degree drift Good entry opportunity
COLLAPSE ≥ 60% retracement, vertical drop Avoid buying the dip
BOUNCE Between healthy and collapse Short opportunity in downtrend
NO_PULLBACK < 10% retracement Price at highs, wait for pullback

Signal Filtering Logic

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UPTREND:
    Top Third:      LONG ✓ (80% odds), SHORT ✗
    Top Half:       LONG ✓ (65% odds), SHORT ✗
    Bottom Half:    LONG ⚠ (35% odds, reduced strength), SHORT ✗
    Bottom Third:   LONG ✗ (15% odds), SHORT ✓ (trend break signal)

DOWNTREND:
    Bottom Third:   SHORT ✓, LONG ✗
    Top Third:      SHORT ✓ (bounce entry), LONG ✗

Sideways/Creeper Market

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Mean reversion logic (opposite of trending): 

SIDEWAYS:
    Top Third:      LONG needs confirmation, SHORT ✓
    Top Half:       LONG needs confirmation, SHORT ✓
    Bottom Half:    LONG needs confirmation, SHORT ✓
    Bottom Third:   LONG ✓ (85% reversal up), SHORT ✗

Configuration

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Parameter Value Description
top_third_threshold 0.66 Above 66% = top third
bottom_third_threshold 0.33 Below 33% = bottom third
top_third_probability 0.80 80% continuation
bottom_third_probability 0.15 15% continuation
swing_lookback_bars 20 Bars for swing detection
three_finger_min_spread_pct 0.02 2% minimum spread
crash_bar_multiplier 2.0 Bar 2x average = crash
crash_bar_close_threshold 0.30 Close within 30% of extreme
healthy_pullback_max_depth 0.50 Max 50% for healthy
collapse_min_depth 0.60 Min 60% for collapse

Output

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ProbabilityZoneResult:

Field Type Description
zone Enum TOP_THIRD, TOP_HALF, BOTTOM_HALF, BOTTOM_THIRD
zone_position_pct float 0-100, where in range
continuation_probability float 0.15 - 0.80
swing_high float Recent swing high
swing_low float Recent swing low
has_three_finger_spread bool Large MA spread detected
ma_structure Enum UPTREND, DOWNTREND, SIDEWAYS, THREE_FINGER_*
pullback_type Enum HEALTHY, COLLAPSE, BOUNCE, NO_PULLBACK
is_crash_bar bool Crash bar detected
crash_bar_magnitude float How many times larger than average
allows_long bool Should LONG be allowed?
allows_short bool Should SHORT be allowed?
signal_strength_modifier float 0.5 - 1.5 multiplier

Dependencies

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Used By:

Provides:

  • Zone classification for signal filtering
  • Continuation probability for strength adjustment

Quick Reference

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Condition LONG SHORT Reason
Top third, uptrend ✓ Strong ✗ Block 80% continuation
Bottom third, uptrend ✗ Block ✓ Allow 85% down probability
Three-finger spread (bull) ✗ Block ✓ Allow Profit-taking imminent
Three-finger spread (bear) ✓ Allow ✗ Block Potential reversal
Crash bar detected ✗ Block ✓ Strong Structural break
Post-crash bounce to top ✗ Block ✓ Strong Bounce short opportunity
Collapse detected ✗ Block ✓ Allow Not healthy pullback
Sideways, top third Needs confirm ✓ Allow Mean reversion
Sideways, bottom third ✓ Strong ✗ Block 85% reversal up
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