DislikedYou said earlier...and I quote, "So why is this interesting? Well, think of this..if you threw those pebbles all at once and you slowy took a survey of about 47 out of 50 distances..imagine you found 5 pebbles that were already at 2 standard deviations away from the mean so far. Now before you look at the rest, you can practically rest assured that they will be closer to the mean than the 5 outliers, because of the nature of "randomness". Since you've already reached the normal limit of numbers that have strayed from the mean, the rest should (provably) be closer. Do you see the dollar signs now?"
Could possibly elaborate a little more for me on this? You said we could ask! lol.
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Thanks for asking. What I was saying there was that when we want to make predictions on the market, we obviously do not have the future data with us, but we are trying to make a statement about the next few bars' closing prices (which we liken to the distance of pebbles from you, as random numbers produced in one variance-limited set). In theory, even if we consider these closing prices to be completely random, they should be variance-limited to their mean, i.e they can only go so far from the mean before heading back. And as this distance/price difference approaches 2 standard deviations or exceeds it, the probability of reversing becomes 95%.
The problem is that we have no way of knowing when the market is going to change it's sentiment/the distribution of random prices which we are referring to, so we cannot make the same mathematically-proven statements about closing prices as we can about the pebbles. If you throw more pebbles with another throw of your hand, the 2 set are not necessarily related, in other words.
Still, the information is not useless. It gives a reasonable measure of the market position, and in absence of huge news it can be used very easily. Combined with our understanding of the market, our following of day-to-day market sentiments and some good experience with price action, we can make lots of pips. Hope this helps and..
Good luck.
Virtue finds and chooses the mean.
Aristotle, Ethica Nichomachea