Price & Volume Breakout Fibonacci Probability [TradeDots]

23. Aug.

📝 OVERVIEW

The "Price & Volume Breakout Fibonacci Probability" indicator is designed to detect the probability of the maximum run-up and drawdown of each breakout trade on an asset, assisting traders in optimizing their take profit and stop loss strategies.

🧮 CALCULATIONS

The algorithm detects price and volume breakouts to activate the Fibonacci levels displayed on the chart. It calculates these levels using the period pivot high and low, with the close price of the breakout bar as the reference price.

The indicator then forward-tests within an user-selected number of bars, detecting the maximum run-up and drawdown during that period. Consequently, it calculates the probability of the price hitting either side of the Fibonacci levels, showing the likelihood of reaching take profit and stop loss targets for each breakout trade.

📊 EXAMPLE



The above example shows two breakout trades, circled within the yellow rectangle zone.

The first trade has a maximum run-up above the +0.382 Fibonacci level zone and a maximum drawdown below the -0.618 Fibonacci level zone.



When the price reaches the maximum run-up, it only has a ~45% probability of moving further upward into the last two zones (25% + 19.44%). This indicates that setting a take profit at a higher level may have less than a 50% chance of success.

Conversely, when the price reaches its maximum drawdown, there is only an ~8% probability of moving further downward into the last drawdown zone. This could indicate a potential reversal.

⚙️ SETTINGS

• Breakout Condition: Determines the type of breakout condition to track: "Price", "Volume", "Price & Volume".
  
• Backtest Period: The maximum run-up and drawdown are detected within this bar period.
  
• Price Breakout Period: Specifies the number of bars the price needs to break out from.
  
• Volume Breakout Period: Specifies the number of bars the volume needs to break out from.
  
• Trendline Confirmation: Confirms that the close price needs to be above the trendline.
  

📈 HOW TO USE

By understanding the probabilities of price movements to both the upside and downside, traders can set take profit and stop loss targets with greater accuracy.

For instance, placing a stop loss order below the zone with the highest probability minimizes the chances of being stopped out of a profitable trade. Conversely, setting a take profit target at the zone with the highest probability increases the win rate.

Additionally, if the price breaches multiple Fibonacci levels during the breakout period, it may indicate an abnormal state, signaling a potential reversal or pullback. This can help traders exit trades in a timely manner.

Traders can adjust their take profit and stop loss levels based on their individual risk tolerance.

RISK DISCLAIMER

Trading entails substantial risk, and most day traders incur losses. All content, tools, scripts, articles, and education provided by TradeDots serve purely informational and educational purposes. Past performances are not definitive predictors of future results.