Daily Speculations

The Web Site of  Victor Niederhoffer & Laurel Kenner

Dedicated to the scientific method, free markets, deflating ballyhoo, creating value, and laughter;  a forum for us to use our meager abilities to make the world of specinvestments a better place.

 

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James Sogi

3/1/5
Probability Fields

Reading about Schroedinger equations and probability fields this weekend was a good way to start thinking in terms of probabilities. Physicists can never determine the location of an electron. The probabilities for detection at different points are given by the Born rule and the wave function collapses after the detection. In trading, our work gives us probabilities for the spread of possible future prices. The question is where to enter. Let's say our 8-Ball work tells us that after a 10 point morning drop into a round numba, (like today) there is a possibility of an afternoon bounce. How can one visualize this in the mind before it happens. I thought that a probability field similar to the graph of Schroedinger equation for a probability field of an electron might be a good template, so I drew one up (I haven't seen these in the charting packages yet).

After the drop, the probability distribution of your expectation for the afternoon or t+x is the shaded area, with the highest probability in the darker area. You want the best price, but also a good chance at at a fill, so put your bid in the lower end of the dark area, (which also might have been the round numba by coincidence, like today) and maybe a few down below in the medium gray part. That way you'll enjoy a high probability of a fill and a good trade during your window. It's a different way to visualize the future in 3 or four dimensions, instead of linear thinking. The extra dimensions are shown in 2d plot by shading of decreasing or increasing probabilities. Stated differently, a three dimensional sphere would leave an elliptical spheroidal shape as it crashed into your two dimensional chart. This a good way to escape Flatland mentality. The probability field should look more like an elliptical spheroid like a cucumber at the end to show the lower confidence as time goes by.

 

James Sogi is a philosopher, Juris Doctor, surfer, trader, investor, musician, black belt, sailor, semi-centenarian. He lives on the mountain in Kona, Hawaii, with his family