Statistical Analysis drives everything at Tradespoon. We try to predict key Support and Resistance levels, which stock to trade on a daily basis determine the predictability factor. It is very important to make sure that you understand the basics of Statistical Analysis in order to generate safe and successful trade ideas. Let’s look at some of the key terms like Bell Shaped Curve, Probability Analysis, and Standard Deviation.
The Bell Curve
What is the bell shape curve and why is it important to know in technical analysis? A Bell-shape curve can be seen in the chart below, which represents a series of rolling dice. When you roll two dice repeatedly, you will get 7 most of the time- or about 60% shown in Figure 39A. Rolling 6 and 8 will likely occur 40% of the time, and so on and so forth. By connecting the points on the Chart, you will draw a Bell-shape curve.
This is the process of analyzing possible future events by considering alternative possible outcomes, also called alternative worlds. Thus, the scenario analysis, which is the main method of projections, does not try to show one exact picture of the future. Instead, it presents several alternative future developments. This is especially true for stock and option trading where it is important to predict the possible outcome of a trade- including where the position of the stock may be by expiration or what the time horizon for the trade is.
Standard Deviation helps determine support and resistance of the underlying stock based on Implied Volatility or Historical Volatility. In Figure 29B, µ indicates the current position of the stock, and naturally it can go up or down. (µ-1) is called 1 Standard Deviation and the Chart predicts the stock to be within this range 68% of the time. (µ-2) is 2 Standard Deviation and the stock is predicted to trade within this range 95% of the time. So, using Statistical Analysis and Bell Shaped Curve, an option or stock trader will be able to predict with a certain amount of accuracy, what the stock price will be by the time the trade comes into realization.
Tradespoon’s Probability Calculator shows Support and Resistance Levels, Trend Predictions, Buy and Sell Rates, and thus helps you determine the Optimal Strategy to implement.
Figure 39C shows Dow Chemical trading at $50.85 and predicts an 11% probability of it gaining about 10% and reaching $54.54 within the next 50 days. On the bottom of the chart, you will see Standard Deviation intervals. These are measurements of Historical Volatility- based on price movements of the past 50 days for DOW Chemicals- and Implied Volatility, which is based on demand and supply in the money options for the next 50 days.