How To Calculate Probabiltiy
Lets say you've developed a trading system. Now you need to evaluate it to make sure the results are better than chance. You need to calculate the probablilty.
A - total number highs and lows that occured during a the
entire time period
w - window width (2 days, 2 weeks, 2 months, 2 years etc.)
t - total time window width you're analyzing in days
B - number of Highs and Lows (or indicator cross'if thats
what you watch for) observed during the time being
analyzed
K - Number of times the signal coincided with a price high
or low (i.e. the number of 'hits' )
note* (K<=B)
note* the asterick symbol below (*) implies multiplication
Then
P = Probaility = A*w / t
N = multiplier = B! / (K! * (B-K)!) where:
K! is K factorial; B! is B factorial etc.
lets say K = 3 then K! = 3 * 2 * 1 = 6
p = N*(PK)*((1-P)(B-K)) = total probability
(probability that what is being observed is due to chance)
