Poisson, from Ralph Vince

March 7, 2013 |

These are still "nothing" days. Breakouts, new highs….nothing days. These are not outlier days. These kinds of days give shorts a chance to cover, longs a chance to add (or reverse) etc. They are not make-or-break days.

It's the kind of days that erase X days of action that are the make or break days. The higher X, the more the day makes or breaks. (The larger X days have historically been to the downside, those there are plenty of large upside days erasing X days of {downward} activity).

Interestingly, if you plot these days, you find that the probability of an X days retracement in a single day is Poisson-distributed (named after the statistician founder, Simeon Denis Poisson). In one of those great moments of serendipity in human discovery, the probability of catching a fish (un poisson!) is — you guessed it!

If you're short, the consolation is that a day which reverses X days of activity IS coming — the "when" part of that is distributed such. If you're long, you need to realize the same thing.


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