Latest revision as of 11:15, 16 January 2026

Probability Zone Analysis

Purpose

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

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

Trading Market Principle

"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

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

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

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

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

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

Trending Market

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

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

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

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

Used By:

signal_generation_trade_management.py - Gate 4: Probability Zone Filter

Provides:

Zone classification for signal filtering
Continuation probability for strength adjustment

Quick Reference

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