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Trading the Zones

Discussion in 'Forex Discussions' started by painofhell, Aug 19, 2016.

  1. painofhell

    painofhell Content Contributor

    Jun 24, 2015
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    Pivot zones can be very revealing to traders. J.T. Jackson has conducted extensive statistical research on a variety of US markets. His research has shown that traders can use daily market action to determine specific probabilities for price to trade within a certain area, and also to highlight support and resistance areas for the following day. These statistics can help enhance the quality of trading signals and (increase the “hit rate” – or number of winning trades). Additionally, these statistics offer insight into the current trend of the market and can signal the underlying strength of the trend. In the following article, this concept is applied to the Dax future, using end-of-day data for the period from 1998 to 2003.

    The concept
    Every trading day is divided into six zones, which are calculated by five pivot lines. On the basis of these zones, a trader can calculate the probability for price to remain within a certain area and can pinpoint support and resistance within those zones. Of particular interest are statistical evaluations of a combination of the zone of the previous close, with the zone of the following day’s open. (See close-open combination.)

    Calculation of the zones
    In order to calculate the zone, one simply needs the high, low, and close of the previous day. The centre of the zones, or the border between zone 3 and zone 4, represents the pivot line. All other zones are based off the position of the centre line and the previous high and low.

    The outer zones (zone 6 and zone 1) are open; all other zones are limited on both sides.

    Figure 1 reveals the degree of probability that price will remain within several of these zones on any given trading day. Initially, the probabilities are distributed symmetrically and comply with the Gaussian distribution. Generally, price remains within the centre zones 3 and 4, with an 82% probability rate. Looking at other zones, 5 and 2 are hit with a 50% probability rate and the extreme zones at 1 and 6 are hit with only a 20% probability rate during a trading day.

    For every trading day, a combination of four figures can be determined, depending on which zone the open, high, low, and close occurred within. Let’s look at an example in which the open occurred in zone 3, the close in zone 5, the low in zone 2, and the close in zone 4. This produces the numerical order 3524. Now, the closing zone of the previous day is added. Let’s say the previous close was in zone 4, which would result in a 4-3524 reading. A close in the extreme zones represents an extremely weak session (zone 1) or conversely an extremely strong session (zone 6). A close in zones 2 or 5 reveals a weak or strong day, respectively, and a close in zone 3 or 4 generally signals a neutral session.

    Many trading methods are based on the fact that profitable daytrades often result in the discrepancy between the previous close and the open. With that data alone, however, one can hardly develop a reliable trading method. The myriad of possibilities of close-open combinations simply appears too infrequently. But, this information can be an extremely useful tool in combination with other technical trading approaches, including chart reading, Stochastics, or Fibonacci retracements.

    Furthermore, the continuous evaluation of the data can help gain a better overview of where the market stands and can help a trader assess the strength or weakness of a specific trading day. Finally, this technique can help traders identify useful stop-levels and profit-targets, in a systematic manner, in order to close positions more profitably.
  2. Sharon Higgins

    Sharon Higgins New Member

    Oct 29, 2014
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    It’s absolutely vital that we trade through the trend and learn it properly, I don’t think we are ever going to reach anywhere without that. Right now, I am trading with OctaFX broker where I get excellent opportunity to trade with comfort and ease, it’s through the magnificent conditions especially with razor sharp spreads from 0.2 pips to high leverage up to 1.500, stop out level of just 15% with zero balance protection, instant payments, swap free accounts, bonuses, rebates and basically everything one can think off, it’s all present here and big reason why I love to work with them and it allows me to succeed as well while the best part is we can start with as low as 5 dollars investment.

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