Confidence Scoring System

This quantitative confidence scoring system is designed to evaluate potential trades against our refined criteria. The system assigns a score from 0-100, with trades scoring 80 or higher considered high-confidence trades with an expected win rate of 80%+.

Scoring Framework Overview

The confidence score is calculated using a weighted scoring system across five key categories:

0-59
Low Confidence
60-79
Moderate Confidence
80-89
High Confidence
90-100
Extremely High Confidence

Each category contains multiple factors that are scored individually and then weighted to produce the final confidence score:

Category Weight Description
Symbol Performance 25% Based on historical win rates for the specific symbol
Setup Quality 25% Evaluates how closely the setup matches our defined criteria
Market Context 20% Assesses broader market conditions and their favorability
Technical Confirmation 20% Measures the strength and alignment of technical indicators
Options Metrics 10% Evaluates the specific options contract characteristics

Detailed Scoring Components

1. Symbol Performance (25 points maximum)

Factor Scoring Method Max Points
Historical Win Rate • 80%+ win rate: 15 points
• 70-79% win rate: 12 points
• 60-69% win rate: 8 points
• Below 60%: 0 points 		15
Recent Performance • Symbol outperforming sector over past 5 days: 5 points
• Symbol neutral to sector: 3 points
• Symbol underperforming sector: 0 points 		5
Volatility Profile • Optimal volatility for setup type: 5 points
• Acceptable volatility: 3 points
• Suboptimal volatility: 0 points 		5

2. Setup Quality (25 points maximum)

Factor Scoring Method Max Points
Primary Conditions Met • All conditions met perfectly: 10 points
• All conditions met minimally: 7 points
• Any condition not met: 0 points (disqualified) 		10
Number of Confirmation Signals • 6+ confirmation signals: 10 points
• 5 confirmation signals: 8 points
• 4 confirmation signals: 6 points
• Fewer than 4: 0 points (disqualified) 		10
Setup-Direction Win Rate • 80%+ historical win rate for this setup-direction: 5 points
• 70-79% win rate: 3 points
• Below 70%: 0 points 		5

3. Market Context (20 points maximum)

Factor Scoring Method Max Points
VIX Level • VIX in optimal range (15-25): 5 points
• VIX in acceptable range (12-15 or 25-30): 2 points
• VIX outside ranges: 0 points 		5
Market Trend Alignment • Market trend strongly aligned with trade direction: 5 points
• Market trend moderately aligned: 3 points
• Market trend neutral: 1 point
• Market trend against trade direction: 0 points 		5
Sector Performance • Sector strongly supporting trade direction: 5 points
• Sector moderately supporting: 3 points
• Sector neutral: 1 point
• Sector against trade direction: 0 points 		5
Economic Calendar • No significant events within 72 hours: 5 points
• Minor events within 72 hours: 2 points
• Major events within 72 hours: 0 points 		5

4. Technical Confirmation (20 points maximum)

Factor Scoring Method Max Points
Indicator Alignment • All indicators aligned with trade direction: 8 points
• Most indicators aligned: 5 points
• Mixed indicator signals: 0 points 		8
Chart Pattern Strength • Strong, clear pattern: 6 points
• Moderate pattern clarity: 3 points
• Weak or unclear pattern: 0 points 		6
Volume Confirmation • Strong volume confirmation: 6 points
• Moderate volume confirmation: 3 points
• No volume confirmation: 0 points 		6

5. Options Metrics (10 points maximum)

Factor Scoring Method Max Points
Liquidity • High liquidity (1000+ OI, 500+ volume): 4 points
• Medium liquidity (500+ OI, 150+ volume): 2 points
• Low liquidity: 0 points 		4
Implied Volatility • IV in optimal range for strategy: 3 points
• IV in acceptable range: 1 point
• IV outside optimal range: 0 points 		3
Bid-Ask Spread • Tight spread (<2% of option price): 3 points
• Moderate spread (2-3% of option price): 1 point
• Wide spread (>3% of option price): 0 points 		3

Confidence Score Calculation

The confidence score is calculated as follows:

  1. Score each individual factor according to the criteria above
  2. Calculate the total points earned in each category
  3. Apply the category weights to the category totals
  4. Sum the weighted category scores to get the final confidence score (0-100)
Confidence Score = (Symbol Performance Score × 0.25) +
(Setup Quality Score × 0.25) +
(Market Context Score × 0.20) +
(Technical Confirmation Score × 0.20) +
(Options Metrics Score × 0.10)

Confidence Score Interpretation

Score Range Interpretation Action
90-100 Extremely High Confidence Take trade with full position size
80-89 High Confidence Take trade with full position size
70-79 Moderate-High Confidence Take trade with 75% position size
60-69 Moderate Confidence Take trade with 50% position size
Below 60 Low Confidence Do not take trade

Implementation Process

To implement the confidence scoring system:

1. Pre-Trade Assessment

  • Complete the scoring worksheet for each potential trade
  • Calculate the confidence score using the weighted formula
  • Only proceed with trades scoring 80 or higher

2. Documentation Requirements

  • Record the detailed score breakdown for each trade taken
  • Document the specific factors that contributed to the score
  • Track the relationship between confidence scores and trade outcomes

3. Continuous Calibration

  • Review scoring accuracy after every 10 trades
  • Adjust factor weights if necessary to improve predictive accuracy
  • Refine scoring criteria based on performance data
Back to Strategy