Why Price Speculations Are Meaningless

7. Juli 2021

It's so easy to get caught up in what the next high or low of an asset will be. Most of the time, people's speculations are based on emotion with some basic trendlines and chart patterns indicating a direction in price action with some bold number listed at the top for a new weekly or monthly high.

This is negligent. If you want to post price predications, it would be beneficial to give price action a range. If you mention the top side while forgetting the bottom, then you're just picking and choosing what data to represent.

The picture shown here -> miro.medium.com/max/24000/1*IdGgdrY_n_9_YfkaCh-dag.png represents a normal distribution pattern. These patterns exist for ALMOST everything in life. It exists for height, weight, and standardized testing. Most importantly, we've come to understand that it can be applied to financial markets as well. Most of any data set lies in and around the mean. As you stray further away from the middle, the existing probabilities for an event become increasingly less probable. Each standard deviation (noted with sigma) represents a "level" and is frequently given in percentiles.

Using the empirical rule we can shorthand these deviation ranges with a simple 68-95-99.7.

What does this tell us?
1. 68% of the data lies within 1 standard deviation from the mean.
2. 95% of the data lies within 2 standard deviations from the mean.
3. 99.7% of the data lies within 3 standard deviations of the mean.

What's very important here is that these levels can also be used to understand how probable an occurrence is given its distance from the mean.

Here is a scenario:
If the mean of the data is 75, and the standard deviation is 5, how common is the value 70?

Since the standard deviation is 5 and the mean is 75, 1 standard deviation below the mean would be 70. If that's the case, then this value would occur approximately 34% of the time.
You could repeat this process in any direction and extension from the mean. If you know the the standard deviation range and the mean, then this is a fairly simple process to calculate.

So let's talk about how this can be applied to financial markets using proper tools - shoutout to @Donnybrook56 and the Alpha trading team for putting this indicator together!

As you can see from the published chart, this indicator shows each of the standard deviation ranges for BTCUSD. The ones shown here are all +/- 3 standard deviation ranges from the current calculation of price on a weekly timeframe. This indicator is important for understanding the market dynamics for the timeframe that you choose to trade on. It is often used for entries and exits and gives you a general idea of how probable it would be to see a certain move on your given TF. If you look back through the history on the published chart, you can see how powerful this tool can be. Deviation bands are often tested, and either smash through or bounce right off of these ranges depending on other factors in the market. These bands are a representation of crude probability, nothing more. They don't show you where price is headed, only what is possible through sheer statistical probability.

Most importantly, these bands give ranges for price. If I were to mention that I believed BTCUSD to close at ~41k by the end of this weekly TF, then I would have to do its justice by saying that it has equal probability to close at ~31k. Don't listen to anyone who gives you clear cut price predictions. They don't exist.