The Probability Cone indicator uses statistical data to predict future price range with specified probability and implied volatility.
It plots a standard deviation curve designating ranges within which prices are predicted.
Thinkorswim has a Probability Analysis tool which is very popular for option trading.
It also has a chart study (ProbabilityOfExpiringCone) that can plot Probability Cone on the most recent bar.
The limitation of the Probability Cone provided by Thinkorswim is that we can only view the cone on the last bar.
It is impossible to know the relative position of current price and previous Probability Cones.
The purpose of this indicator is to give us the ability to back test the Probability Cone.
Features and inputs.
For example, if we have Probability=68.3, IV=0.11 and Bar =20.
The Probability Cone will be calculated and plotted from 20 bars back of the last bar on chart.
Normally, the Probability Cone is used for stock options analysis, but we can also use it in Forex.
The chart shown in below is a perfect example of applying it on FX.
When I test this indicator, I noticed that sometimes we can get better results if we plot the cone from previous swing high and low.
The extension lines of two Cones may form a support and resistance zone.
Copyright @ 2017 Patternsmart - All rights reserved
This website is for educational and informational purposes only and should not be considered a solicitation to buy or sell a futures contract or make any other type of investment decision. The companies and services listed on this website are not to be considered a recommendation and it is the reader's responsibility to evaluate any product, service, or company. patternsmart is not responsible for the accuracy or content of any product, service or company linked to on this website.
Futures trading contains substantial risk and is not for every investor. An investor could potentially lose all or more than the initial investment. Risk capital is money that can be lost without jeopardizing ones financial security or life style. Only risk capital should be used for trading and only those with sufficient risk capital should consider trading. Past performance is not necessarily indicative of future results.
Trading stocks, options, futures and forex involves speculation, and the risk of loss can be substantial.Investor must consider all relevant risk factors, including their own personal financial situation, before trading. Trading foreign exchange on margin carries a high level of risk, as well as its own unique risk factors. Forex investments are subject to counter-party risk, as there is no central clearing organization for these transactions. Please read the following risk disclosure before considering the trading of this product: Forex Risk Disclosure. Spreads, Straddles, and other multiple-leg option strategies can entail substantial transaction costs, including multiple commissions, which may impact any potential return. Options are not suitable for all investors as the special risks inherent to options trading may expose investors to potentially rapid and substantial losses. Prior to trading options, you should carefully read Characteristics and Risks of Standardized Options.
patternsmart.com will not be held liable for the loss of money or any damage caused from relying on the information on this site. Any investment decision you make in your self-directed account is solely your responsibility.