Probability of staying within a range

Clients,

Today I will discuss a topic that is so great. I I wish it was talked about more in the industry but as of yet, it is still a hush hush topic. I can’t speculate as to why but here goes.

Based upon past performance of various securities, there can be calculated a probability of a price range move within a specified amount of time. For instance, If the US Tech 100 has moved X points per hour, day, or week over the last X bars, there can be a calculation to figure out the average range as well as a probability of it staying within or moving outside of a range over the next hour, day or week.

Let us take a look at a live example as of today.

Now look at the chart. The expected range is etween 10 and 18 points of movement between 11am and 12pm eastern on the US Tech 100 for today.

There is a 68% chance it will stay in this range and a 32% chance it will move out of this range.

If price moves toward the top of the range and you can sell it for $32 at the top of the range, you will be using a break even strategy. If you can sell it for $50 at the top of the range, you will be using a profitable strategy.

Look at it this way….

Over the course of 1,000 trades, If you are selling for $32, then you will make $21,760 n 680 wins. Likewise, you will lose $21,760 on 320 losses.

Now look at the difference of selling for $50

680 wins = $34,000
320 losses = $16,000
Total P/L = +$18,000

Here is another way to play. If you are comfortable losing a lot and making gigantic winners, you can reverse it.

Lets assume you buy for $10 or sell for $90 to try to capture gains if price moves outside of the range.
Now remember you have to sell or buy back at $50. Let us look at 1,000 trades.

320 wins = $28,800
680 losses = $6,800
Total P/L = $22,000

So it is 10:30am eastern right now. Lets see what price on the US Tech 100 does before 12pm. Let us observe if this time period will be a 68% day or a 32% day.

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