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THE ROAD TO TRADING WISDOM

STATISTICS AND PROBABILITY > THE ROAD TO TRADING WISDOM

PA0002 Daily Up Bar Chart Evolution

Master traders, like in any other life long professionals, intuitively develop a sixths sense for trading after keenly studying thousands of charts to build a library of high probability profitable chart trading patterns that repeat themselves.  Patterns are a fact of life and nature.  Chart patterns are a reflection of how all investors interpret the current world wide social, political, business, fiscal, media and  economic perceptions and cycles in the short, medium and long term.   The historical database of intraday, daily, weekly, monthly and yearly fluctiations of the markets provide us with the raw data (tick or OHCL) – See Article SS0002 Historical Data Basics For Statistics And Probability Studies -to apply statistical and probibility methodology and analysis to identify high probability trading setups and define a set of golden rules to become a succesful trader over time.  A wise investor seeks to win in more than 70% of the trades since It is impossible to win 100% of the time.  Perfectionism is an extremely expensive hobby when dealing with the markets.  This article is the initation to statistics and probability applied to trading.  Read more interesting articles in the Mental Health and Market Sentimente Sections.

STATISTICS is the discipline that concerns the collection, organization, analysis, interpretation, and presentation of data. The most basic trading data unit is a trading TICK, which is composed of time, price and volume data for any given tradeable security.

PROBABILITY is a branch of mathematics that deals with calculating the likelihood of the occurrence of a given event, which is expressed as a number between 0 and 1 or 0% and 100%.  The goal is to identify trades with a probability of 75% or higher success rate.

STATISTICS AND PROBABILITIES APPLIED TO BULL AND BEAR INTRABARs

The most basic  and foundational concept of Chart Reading is the definition of a single or intrabar, which could be a Bull/Up or a Bear/Down Bar.  An Up Bar (1UB) is defined as a bar with a Close (C) above the Miderange (M) and a Down Bar (1DB) is defined as a bar with a Close (C) below or equal to the Miderange (M).  The Midrange (M) is defined as the middle point between the High (H) and the Low (L) of the bar.  The acronyms Up Bar (1UB) and Down Bar (1DB) will be used to avoid confusion between Bullish and Bearish since they both start with the letter B.  The number 1 in front of the acronym denotes that the reference is made to events within the same bar or intrabar, since multiple bar or interbar relationships may lead to confusion with Up or Down nomenclatures as will be noted in future articles. For more information see article  PA0002 OHCLM Bars Price Action Basics.

SS0001 BULLISH OR UP BAR

UP & DOWN BAR STATISTICS

 

Index
S&P 500
Time Range
1982-2021
Bar Timeframe
Daily
# of Total Bars
9.832
# of Up Bars (1UB)
5.537
% of Up Bars (1UB)
56.32%
# of Down Bars (1DB)
4.295
% of Down Bars (1DB)
43.68%
SS0001 BEAR OR DOWN BAR
SS0001 SP500 39 years

INTERPRETATION OF PROBABILITY RESULTS

From the 9.832 bar sample of the S&P 500 index from 1982 to 2021 we find that 5.537 or 56.32% were Up Bars (1UB) and 4.295 or 43.68% were Down Bars (1DB).  It is just a little better than a coin toss.  This asymmetry with a bullish bias is expectedto to be even higher, since market indexes like the S&P 500 have a natural tendency to go up over time due to the fact that the economy is always expanding long term and the 500 companies that compose the index are changed ocassionally so that its value reflects the most successful companies of the current economic cycle.  In 2021 the S&P 500 index represented over 75% of the USA equity market capitalization and it was worth over US$ 11 trillioin.

 

WARNING – Price action statistics and probability studies should be applied to indexes with a large sample number of components in order to smooth the behavior of the individual index components for optimal results and to provide a more accurate read of the market as a whole.  Individual securities are influenced severely by specific news events, financial performance, sector rotation and analyst forecasts among many other factors that will result in outlier events.

THE KEY – Use price action statistics and probability studies to trade index derivatives or to decide when to buy or sell individual securities that meet specific fundamental and/or technical criteria in order to make investment decisition in synch with the general market trend. 

IMPORTANT – Always make double sure that the historical sample data, tick or OHCLM, of the security to be analyzed in the statistical and probability studies is of extremely high quality, meaning clean, true and accurate.  See article SS0002 Historical Data Basics For Statistics and Probability Studies.

 

sWHAT´S NEXT?

The probabilities on Up Bars (1UP) and Down Bars (1DB) provided above are of little value for trading.  However, the right questions will provide valuable clues to make wiser investment decisions.   The objective is to analyse the historical data using scientific statiscical methodology to identify  patterns that repeat themselves with at least a 70% probability success rate in order to take any trade.   Let´s start this fascinating journey by looking into some basic interbar Price Action probabilities.   This about the  next questions!

BRILLIANT

IDEA

WHAT IS THE PROBABILITY  OF TOMORROW?

breaking today´s low?

The probability of tomorrow breaking today´s Low (L) is an important factor before deciding to sell or enter a short position.

Breaking today´s High?

The probability of tomorrow breaking today´s High (H) is an important factor before deciding to buy or enter a long position.

BREAKING TODAY´s HIGH and LOW?

After breaking a high or a low it is important to know the probability of the market reversing the trend and breaking the High (H) and the Low (L) the same day creating an Outiside Bar (OB).

NOT BREAKING TODAY´s HIGH OR LOW?

If today´s High (H)  and Low (L) are not broken tomorrow, creating an Inside Bar (IB), it would be an important indication that the market is consolidating awaiting the start of new trend direction.

INTRABAR AND INTERBAR CHARTS

It is extremely important to note that the daily graph above shows only intrabar or within the same bar Up bars (1UB) in color green and Down Bars (1DB) in color red.  This graph differs from the standard or classic daily interbar relationship charts used in all trading platforms for any stock, commodity or derivative.   In standard charts the difference between the Close (C) of the current bar and the Close (C) of the previous bar defines if the relationship between them is bullish or bearish.    If the close of the current bar is higher than the close of the previous bar then the current bar will be color green and if the Close (C) of the current bar is lower than the Close (C) of the previous bar the current bar will be color red.   See article PA0005 Intrabar and Interbar Bar Charts Basics.

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