Calculating odds of price moves

Discussion in 'Technical Analysis' started by Whoarewe, Dec 17, 2007.

  1. Whoarewe



    I’m wondering if anyone can help me. I want to be able to estimate the odds of various price events happening. Specifically, I’m interested in longshot events. For example, if a particular price pattern forms on a chart, I’d like to be able to estimate that price has a 10 to 1 chance of rising to a specific level in a specific amount of time. The same idea if price moves in a certain way at support/resistance or passes through a given moving average. It doesn't matter what the preceding event is.

    I realize that many factors come into play. The odds could differ depending on time of day. And they could change over time as market conditions change. But I’m not concerned about that just now. I’m simply looking for a basic approach that I can use for estimating the likelihood of prices moves occurring.

    Thanks in advance for any help you can provide.
  2. MGJ


    If you're comfortable with math, you could apply the tools of options analysis to the problem. To calculate the odds (probability) of price moving from P1 today, to P2 on day D2, just consider it to be a call option with strike price P2 and expiration day D2. Then run the options pricing formulae to compute the option's "fair value" and all the Greeks. The Delta is a good estimate of the probability that the option will finish in-the-money, i.e., that price will rise from P1 today, to P2 (or higher) on day D2.

    You might already own software that does these calculations.