Essay Example on How efficient is probability in a stock Market








How efficient is probability in a stock market What is probability Probability is the measure of the chances that an event will occur it is classified as a number between 0 and 1 where 0 shows that it's impossible and 1 shows certainty The higher the probability of an event the more likely it is that the event will occur How is probability linked All investing techniques and strategies are events of certainty and uncertainty and Usually all the time we don't actually estimate numerical probability but it's always there When we buy a stock or a fund we never know if it will be a profitable gain or a loss but we are aware that betting the probability of gain is greater than the probability of loss To build confidence in betting with help of probabilities efficiency then it always pays to see many occasions of how usual bets worked out in the past and either the stockholders have profited or not Probability theorem for investors So how do some investors can easily and accurately predict short term movements with stocks Let's look at probability theory illustrated in a simple example

If you flip a coin you have 50 probability of heads and a 50 probability of tails If you ask 100 people to predict the outcome of a single coin flip the probability is 50 will guess correctly and 50 will guess it wrong Flip the coin twice and odds are only 25 of predictors will guess both flips correctly The accuracy will fall with each extra coin flip At the end of 10 coin flips the odds are only 1 out of 1000 will have predicted every coin flip correctly These are totally random events and the odds are 1 out of the 1000 would get ten correct guesses in a row Picking the right stock Knowing how to pick stocks is one of the major keys to successful stock trading Stock market picks aren't found just randomly but it is a terrific way to shift your perspective and idea towards it and get a serious thought and technique about picking the right stocks which is to be used probability in developing your stock market trading strategies Historically the most successful stock traders have used probability as a strategy building essential for picking the best stocks They know that at the heart of picking stocks with a strong directional momentum are factors that can be broken down into pieces and each piece can then be qualified as an element of probability

As you know a probability is the likelihood of a particular thing to occur If you want to buy a stock that will likely rise or decline for shorting you need to line up as many probabilities in a stockholders favor as you can without over complicating the strategy Let's take a look at what kind of probabilities you could be adding to your list for how to pick stocks Some are pretty basic and some are based on price patterns and technical setups that have been observed of strongly trending stocks The categories of probability factors are news market trend fundamental analysis and technical indicators How profitable can probability users benefit Nowadays people in the stock market that profit are earning not just because they have good timings or runs but they get the concept in two ways First way is based upon profiting all the time or at least gaining or winning more than losing Second way is by using probability and this does not make the market a 50 gamble same as in the coin toss example Stock prices tend to shift into certain directions over period of time and they have done this repetitively over the history of the market Probability is similar to statistics and it proves that runs are trending in the occurrence of stocks This will lead us to probability curve which is not common

This means that traders can profit on a continuous runs if they used trends and even if it is on an extremely short period Basically if trends is a thing then we can no longer have a random data trades due to the bias in the trading that will reflect a trend and that's why it is a 50 50 chance A trader should not increase his spot or apply risk on his position because of his winnings Runs Chance 1 50 2 25 3 12 5 4 6 25 5 3 125 Here is where we run into problems as lets say I have created five profitable trades in a row According to the table which is giving us the probability of being right or wrong is five times in a row based on a 50 chance we have already overcome some serious odds our odds of success are still 50 and people lose thousands of dollars in the market by failing to realize this The reason is that the odds from our table are based on uncertain future events and the likelihood they will occur Once we have completed a run of five successful trades these trades are no longer uncertain Our trade starts on a new potential run and after that the results are in each trade lets go back at the top of the table and this means every trade has a 50 chance of working out

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