Mathematical probability of Trade set up

S

sss12

Have studies been done on the differences in the mathematical probabilities of success in predicting direction of the underlying between different GENERAL trade set ups ? If so, any information on the results or sources would be great.

Ex : trend continuing/break through. Vs
Reversion to trend. Vs
counter trend trade, etc.


Thanks.
 
sss12 said:
Have studies been done on the differences in the mathematical probabilities of success in predicting direction of the underlying between different GENERAL trade set ups ? If so, any information on the results or sources would be great.

Ex : trend continuing/break through. Vs
Reversion to trend. Vs
counter trend trade, etc.


Thanks.
More...
IB use to provide a probability tool. You can do this yourself by creating a distribution and solving for where price will be.
 
Here is some Excel formulas to help you:

stdev = (ln(future_price/current_price))/(volatility*sqrt(days_til_expiry/252))

probability = normsdist(stdev)

The one uncertain value is volatility. How good you are at predicting volatility can make or break the trade. Also, this is the probability of finishing OTM at expiry. The probaility of touching the future price (strike price) anytime before expiry is approx. twice the probability given here.
 
sss12 said:
Have studies been done on the differences in the mathematical probabilities of success in predicting direction of the underlying between different GENERAL trade set ups ? If so, any information on the results or sources would be great.

Ex : trend continuing/break through. Vs
Reversion to trend. Vs
counter trend trade, etc.


Thanks.
More...

 
Thinking in terms of probabilities in trading is some sort of new age retail mind set. IMHO - the only things that seems to hold true over time is:

* Markets moves follow a non-normal distribution curve highlighted by large tails, narrow mid-ranges and a high peak., this has been proven in academia.

* Markets are very predictable. All excesses regress to the mean, but before the regress to the mean it reverts to the other excess. That pendulum swings back and forth. The excess is driven by accounting as it always is. The crowd herds in at tops and capitulates at the bottoms - this cycle repeats, over & over
 
comagnum said:
Thinking in terms of probabilities in trading is some sort of new age retail mind set. IMHO - the only things that seems to hold true over time is:

* Markets moves follow a non-normal distribution curve highlighted by large tails, narrow mid-ranges and a high peak., this has been proven in academia.

* Markets are very predictable. All excesses regress to the mean, but before the regress to the mean it reverts to the other excess. That pendulum swings back and forth. The excess is driven by accounting as it always is. The crowd herds in at tops and capitulates at the bottoms - this cycle repeats, over & over
More...
@comagnum while you may not define it as such, your points are quantified by probability study.
 
What I guess you make that argument since nothing is guaranteed to remain the same than everything could be considered to have probabilities - although outlined from a historical perspective this is the nature of markets going back to the 17th century. So yea - I see your point of view.

I don't like to think in terms of probabilities in trading - it opens the door to distorted thinking. I like to think every trade I put on could put me the poor house - keeps me a lot sharper.
 
sss12 said:
Have studies been done on the differences in the mathematical probabilities of success in predicting direction of the underlying between different GENERAL trade set ups ? If so, any information on the results or sources would be great.
More...

Relative strength work done by a computer researcher named Robert A. Levy suggested that restricting new purchases to only those stocks in the top 5% of relative strength ranks improves performance significantly. However, relative strength performs best in a rising market and is therefore a valid stock selection tool only about half of the time.

Also, the stock selection indicators that have been proven to be most profitable during bull markets are based on: (1) volatility, (2) relative price strength, and (3) insider trading according to Norman G. Fosback.

According to Ross Givens, one of the most profitable ways to trade stocks is to follow insider trades by copying the purchases of a small handful of CEOs, CFOs, board members and the like who suddenly start buying tons and tons of their own companies’ stocks due to their private knowledge of yet to be announced sales growth, upcoming product or service launches, major new customers, new executive hires, recent legal resolutions, imminent FDA drug approvals, new legislation/federal permits, and/or approaching mergers/acquisitions.

He says this approach works in both bull and bear markets!

He looks at thousands of daily insider transactions each year and eliminates those involving stock options, routine purchases, small-sized trades, and actively traded or diversified funds to identify those insider purchases that point to equities that are almost guaranteed to return phenomenal gains within the next year!

On average, this ends up pointing to only about three new stock selections per month, but some on them can turn out to be big, big winners.
 
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