Charting Probabilities

Charting is all about where you are and what might happen next. Seeing the statistical probabilities of further poves is surely a big help when thinking about the market. This article gives you a free set of indicator which will help you differ the likely from the unlikely.

Charting Probabilities

One key thing to consistent profits in trading is to base it on likely events. Markets might crash from time to time, you better be prepared, but on average the market stays within expectations given by statistics. Charting the probabilities helps a lot to stay grounded and not to expect the impossible in analysis and trading.

The chart below shows several indicators to get an idea of future moves.

First a projection of the expected move is done. One projection cone is calculated using the historic volatility of the data, the second one (the wider one) is done using the implied volatility given by the option market. This expected move projection is a delta neutral projection. It has got no long or short bias. The probability of being within the implied volatility cone (at the end of the projection) is roughly between 70 and 80%

On the right side of the chart you see a histogram representing the probabilities of a market moves. This histogram is calculated using all historic returns over the selected projection period. Due to the bullish bias of  historic stock market data this projection is not delta neutral, but shifted upwards.

charting probabilities

charting probabilities

On the bottom of the chart above and on the chart below you see a price distribution diagram. It shows the probability of the market of being in a specific price range. This diagram can be used to search for support & resistance zones.

price distribution

Download Tradesignal10 Workspace

If you are using TradeSignal10 you can download a workspace containing the indicators shown above for free and unlimited usage. Please find the workspace file via this link: http://quanttrader.com/download/qt_returns_price_dist.eqw