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2020issue C0210-17

Treat the zigzag threshold as a volatility-scaled construction variable

A new zigzag segment is declared only after price exceeds a pip threshold from the current segment high or low. When a mechanical trading system chooses that threshold from a volatility-to-threshold map, rule-based entry, trailing exit, and reversal can share one measurement scale.

  • A new up or down zigzag segment is declared only after price changes by more than a pip threshold from the high or low of the current segment.
  • Volatility, measured as mean absolute close-to-close change, is a required environment input because it changes substantially through time and scales directional-change counts.
  • The mechanical model selects the zigzag threshold from a volatility-to-threshold map so average segment length can be predicted from the current volatility reading.
  • Rule-based entry, trailing exit, and reversal then use that predicted scale inside one mechanical trading system rather than three separate levels.
Entries in this reading3 entries
Current trackTrailing exit18 readingsMechanical trading system158 readingsRule-based entry174 readings

Start from the segment rule, not a fixed pip level

A new up or down zigzag segment is declared only after price changes by more than a pip threshold from the high or low of the current segment. Average zigzag segment length is constructed as the bar sample divided by the average number of directional changes and is later used as a model input.

Expected average return per unfinished segment is compared with the live price move to support an entry, hold, or reverse decision.

Let volatility set the measurement scale

Volatility, measured as mean absolute close-to-close change, is treated as a required environment input because it changes substantially through time. At a chosen threshold, directional-change counts also scale with volatility, which lets average segment length be predicted from the current volatility reading.

The mechanical model selects its zigzag threshold from a volatility-to-threshold scaling map so the measurement scale is not a fixed pip constant.

Use the same scale for entry, trailing exit, and reversal

A trailing exit may be sized in proportion to the predicted average segment return as part of the same rule set. The trend rule enters long or short at the first close that exceeds the threshold and opens a new segment, then consults expected length and average values.

The reversal rule flips the position when both the length and the price change of the still-open segment exceed their expected averages.

Keep both examples in one mechanical trading system

Both example procedures were coded as one mechanical trading system and run on hourly euro-dollar tick history. The archive describes that historical workflow.

Educational research material, not investment advice. Historical source context does not establish present-day performance.
18 of 18 in the Trailing exit track
1988Track finished · Next track: Trailing stopHalf-day bars, a midpoint gate, and a bar-based trail72 readings
All readings on this track · 18 readings
  1. 1988Constructing a mechanical trend system with independent trailing exits
  2. 1991Write a staged RSI exit book with trailing stops
  3. 1993Evaluating filter-trigger trailing exits after breakouts
  4. 1995Weekly-close breakout entry and trailing exit in Eurodollars
  5. 1996Evaluating moving-average turn entries and slope exits
  6. 1997Precommit an equity-risk cap and a profit-retracement exit
  7. 1998Exit stops before entries
  8. 1998Exit rules evaluated with a fixed random entry
  9. 2002Construct the stay-or-flatten decision before entry
  10. 2006Audit the stop, trail, and risk-reward stack as one procedure
  11. 2007Building a momentum system with relative strength and trailing exits
  12. 2013When buy and hold needs a sell rule
  13. 2013A mechanical trend toolkit that turns screens into one entry-exit procedure
  14. 2014Is a two-period relative strength index, a channel breakout, and a trailing exit one long-only procedure?
  15. 2016Trend-aligned option entries and trailing exits
  16. 2017Monthly three-black candles as a trailing exit
  17. 2018Evaluating profit-taking and reentry in trend following
  18. 2020Treat the zigzag threshold as a volatility-scaled construction variable
By fieldEntry and exit rules206 readingsBy year202085 readings
All 18 readings tagged Trailing exit
Also on Trailing exit5 readings
1995Weekly-close breakout entry and trailing exit in Eurodollars2013A mechanical trend toolkit that turns screens into one entry-exit procedure1988Constructing a mechanical trend system with independent trailing exits1991Write a staged RSI exit book with trailing stops1996Evaluating moving-average turn entries and slope exits