Technical analysis is the hunt for answers in otherwise random noise. We often lean towards over complicating ideas simply because they help drive a narrative we have already come up with. But that is the antithesis of analysis!
Lines on charts mean nothing, but rather what the lines represent is the important factor. So with that said, I wanted to touch on a topic that is rarely discussed:
RANDOMNESS & PROBABILITY
Most people have heard of 'the bell curve', usually in relation to school grades. In statistics, the bell curve is a representation of how a sample of data is distributed against the average of that data that has been sampled. That is to say, we know there will always be some randomness is any real world data - whether it be the height of 30 year old men, or the daily closing price of Bitcoin.
In this picture, we can see a few things:
Importantly, this does not tell you what will happen. Instead, it will tell you what will probably happen. So how can someone use this data? Assuming the overall trend continues, the probability of the price being within the upper and lower white lines is 86.5%. Said another way:
Additionally, there is a less than 1% chance of a price below the lower yellow line; assuming that trend continues. This can act as a good litmus test for any changes to the data trend.
This is something that anyone can do, with as little as a data export and your choice of spreadsheet program. Technical analysis does not need to be complicated; and in fact it is often the most simple to explain concepts that are the most successful.
Happy Trading!
Lines on charts mean nothing, but rather what the lines represent is the important factor. So with that said, I wanted to touch on a topic that is rarely discussed:
RANDOMNESS & PROBABILITY
Most people have heard of 'the bell curve', usually in relation to school grades. In statistics, the bell curve is a representation of how a sample of data is distributed against the average of that data that has been sampled. That is to say, we know there will always be some randomness is any real world data - whether it be the height of 30 year old men, or the daily closing price of Bitcoin.
In this picture, we can see a few things:
- Since the March crash, there has been an increase in price (anyone with eyes can see this...)
- By using regression, we can take an average trend over the sampled data (March - Current close)
- Once the trend line is found, we can now calculate how much each close deviates from that trend. This is known as the "Standard Deviation"
- The trend (mean) +/- the standard deviation is the effective range we would expect the daily close to finish with.
Importantly, this does not tell you what will happen. Instead, it will tell you what will probably happen. So how can someone use this data? Assuming the overall trend continues, the probability of the price being within the upper and lower white lines is 86.5%. Said another way:
- There is less than a 10% chance the price will be above the upper white line, and
- There is less than a 10% chance the price will be below the lower white line.
Additionally, there is a less than 1% chance of a price below the lower yellow line; assuming that trend continues. This can act as a good litmus test for any changes to the data trend.
This is something that anyone can do, with as little as a data export and your choice of spreadsheet program. Technical analysis does not need to be complicated; and in fact it is often the most simple to explain concepts that are the most successful.
Happy Trading!
