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October 20th, 2010, 01:59 PM   #1
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Trading the markets - Probability quetion

Iím trying to analyse my stock market trading strategies.

I have listed the gains (a positive number) and losses (a negative number) that Iíve made on particular trades on the stock market.
I have listed the value of a stock market price volatility indicator (Bollinger Band) at the time of placing the trade.

Just looking at the list Iíve noticed that sometimes I have made a gain when the Bollinger value is low and sometimes high BUT larger Bollinger values seem to give larger gains (sometimes). So Iím hoping some sort of mathematical analysis will help identify a vague trading pattern.

[color=#4000FF]I need to know what is the probability of making a stock market gain at a particular Bollinger value.

For example from the data that Iíve given if I make a trade and the Bollinger reads, say 55 what is the likely numerical gain or loss. Or what is the probability that I will make a gain?[/color]

Is there a formula or method that can be used to work this out using the data I have given?

[color=#FF4000]-20[/color] is the loss I made when the Bollinger read 31
[color=#FF4000]-9 [/color] is the loss I made when the Bollinger read 29
[color=#0000FF]20[/color] is the gain I made when the Bollinger read 28
[color=#0000FF]9[/color] is the gain I made when the Bollinger read 39
[color=#FF4000]-1[/color] is the loss I made when the Bollinger read 39
[color=#0000FF]23[/color] is the gain I made when the Bollinger read 41
[color=#0000FF]15[/color] is the gain I made when the Bollinger read 29
[color=#0000FF]20[/color] is the gain I made when the Bollinger read 58
[color=#0000FF]4[/color] is the gain I made when the Bollinger read 36
[color=#FF4000]-20[/color] is the loss I made when the Bollinger read 62
[color=#0000FF]62[/color] is the gain I made when the Bollinger read 66
[color=#FF4000]-25[/color] is the loss I made when the Bollinger read 80
[color=#FF4000]-12[/color] is the loss I made when the Bollinger read 82
[color=#0000FF]50[/color] is the gain I made when the Bollinger read 100
[color=#FF4000]-9[/color] is the loss I made when the Bollinger read 165
[color=#0000FF]16[/color] is the gain I made when the Bollinger read 152



I hope to find a formula that links the winning trades to the Bollinger values.

Is it just someting as simple as working out the average value of the Bollinger that gives the winning trade? I'm not a mathematician so avarages is as far as it goes for me. I hope to find a formula that I can paste into an Excel table.



PS these are not real trade data .... just my practice data. In real life I don't do too well on the stock market LOL
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October 20th, 2010, 06:54 PM   #2
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Re: Trading the markets - Probability quetion

Really, there's no mathematical validity to Bollinger bands (or, for that matter, to much of technical analysis).* But if you want to study it, by all means feel free.

Your first problem (apart from the above) is that you seem to have very little data. If you have more (like... a lot more), no problem; if not, collect as much as possible. A hundred times what you posted would be a start.

With enough data, the next step would be a chi-square test.

* Frankly, my opinion is that there are only two ways to get rich using technical analysis: be lucky or write a book on technical analysis.
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November 1st, 2010, 06:45 AM   #3
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Re: Trading the markets - Probability quetion

What is a chi square test ?
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November 1st, 2010, 12:37 PM   #4
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Re: Trading the markets - Probability quetion

http://en.wikipedia.org/wiki/Chi-square_test
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November 2nd, 2010, 06:57 AM   #5
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Re: Trading the markets - Probability quetion

Thanks for the answer.
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November 12th, 2010, 11:53 AM   #6
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Re: Trading the markets - Probability quetion

CRG: I agree with you that there's little ground to technical analysis; nonetheless, it is possible to find "statistical winning strategies" on the market; the point is, most of the times, these statistical inefficiencies cannot be exploited (because they are so tiny, or because they require blazing fast access to the markets). I've already verified a few of them myself (over thousands of days of data, and over several different securities, having a Bloomberg access myself ) and I know that some funds (most notably the Renaissance fund) made their fortune using statistical analysis (not the technical bullship advocated by these "get right quick" schemes, but rigorous statistics).
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November 13th, 2010, 06:20 AM   #7
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Re: Trading the markets - Probability quetion

Quote:
Originally Posted by julien
I know that some funds (most notably the Renaissance fund) made their fortune using statistical analysis (not the technical bullship advocated by these "get right quick" schemes, but rigorous statistics).
I'm frankly skeptical. Given the large number of funds, and the large minority that primarily use statistical analysis, it's not surprising that some would be doing very well just by chance.

Of course I have no background in financial mathematics.
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