For Those of You Good at Math and Probabilities.

[Nvesta81 10]

This might be a dumb question but I'm compelled to ask anyway.

 

Does anyone here know how I would go about calculating the probability (percentage wise) of price reaching a certain point completely disregarding past behavior?

 

For example, say we ignore setups, patterns etc, and just randomly place a trade at any given time... so you buy at a stock at $10, you set a target at 15$, and a stop at $5. This would be an equal distribution so I would assume you have a 50/50 chance of your stop/target being hit, basically equal odds right?

 

So how would I calculate the probablity of entering at $10, target $20, and place a stop at $5... the distribution is no longer equal so things change quite a bit. I'm not very good at math so I could use some help... for some of you this is a cake walk I'm sure.

 

Any input is greatly appreciated, thanks.

[Tams 20]

This might be a dumb question but I'm compelled to ask anyway.

 

Does anyone here know how I would go about calculating the probability (percentage wise) of price reaching a certain point completely disregarding past behavior?

you don't need past behavior.

Past behavior only gives you a prediction of repeating the past behavior. e.g Bollinger Bands.

 

For example, say we ignore setups, patterns etc, and just randomly place a trade at any given time... so you buy at a stock at $10, you set a target at 15$, and a stop at $5. This would be an equal distribution so I would assume you have a 50/50 chance of your stop/target being hit, basically equal odds right?

wrong.

 

it has a 50/50 chance on the next uptick/downtick, not the profit target.

less then 50/50 if there is a chance for unchange.

 

So how would I calculate the probablity of entering at $10, target $20, and place a stop at $5... the distribution is no longer equal so things change quite a bit. I'm not very good at math so I could use some help... for some of you this is a cake walk I'm sure.

 

Any input is greatly appreciated, thanks.

find the number of permutation between $10 and $20, and you have your probability.

[TheDude 10]

you should read up on volatility expressed as a standard deviation. try a google of that and/or black-scholes pricing model which basically assumes prices are random, and the current price is the mean.

 

it does pretty much what your asking for

 

as tams implies, prices are not normally distributed - if your market is trading at $20 my bet is it cant go below $0, but could go way beyond $40, so you have an lognormal distribution (i think thats the term)

[dangermouseb 10]

current price at 10, stop loss at 5, stop profit at 20.

assuming arbitrage free random price process then expected P/L = 0 =>

0 = pStopLoss * lossAmount + pStopProfit * profitAmount

0 = pStopLoss * (-5) + pStopProfit * (10)

 

also pStopLoss + pStopProfit = 1

 

=> pStopLoss = 2/3, pStopProfit =1/3

 

also this implies it doesn't matter what your underlying process is

 

if you're wanting to think in these terms you should start learning some maths ;o)

 

best

 

DM