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Strategies & Market Trends : DAYTRADING Fundamentals
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To: TheKelster who wrote (1944)7/21/1999 9:48:00 PM
From: brec  Read Replies (1) of 18137
 
Probabilities: Still using a target of 5.25 and a protective stop of 3 7/16 there are now 25 favorable steps in the same set of 29 total steps (again ignoring no movement). Thus 25/29=86.2% probability of making a profit with this trade.

Such a calculation assumes that each possible exit price between the stop and the target is equiprobable. Is there some justification for such an assumption? The usual assumption is that the distribution of future prices is convex -- that there is some most-probable future price (typically at or near the current price) and that future prices are less probable the more distant they are from that most-probable price.

Another way of saying this is that the quoted calculation assumes a frequency distribution of future prices that is flat (rectangular), whereas a bell-shaped distribution is the usual presumption.
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