Probability Analysis

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Video Transcript:

Hello, traders. Welcome to the Think or Swim Tutorial and the fifth module, Analyze Tab. In this lesson, we’re going to go through the probability analysis of the simulated trade of five crude oil contracts on the long side of the market. So we’re going to go to the Think or Swim platform and go to the Analyze Tab and the Probability Analysis sub tab and this is the probability analysis chart that you are going to be looking if you are analyzing five contracts on the long side of the market at the current market price. Now, I know it looks a little scary, but it’s actually pretty easy to understand.

Probability Analysis ThinkorSwim Platform

Right here at the top left side of this chart, you’re going to see the implied volatility that is used to calculate the price movements on crude oil. If you change the symbol or if you change the instrument that you are analyzing, the implied volatility will also change because the implied volatility to analyze price fluctuations is not the same on every market. Now, right here, we have reset the offset values to a plus 6% and a minus 6% move in the market. You can see them right here, and you can move them accordingly just by clicking on them and moving them up and down.

Now, this is not the most important part of this graph but the most important part of this analysis graph is actually the oval chart that you can see here. Now, the entry price or the zero level is right here at the current market price which is 4443 if I’m not mistaken. Now, if you hover your mouse, you can see that you have an actual crosshair tool with two percentages on each side of the crosshair tool. The offset percentage shows you the percentage of the price being above 3424 at this time of the year which is the 8th of November, and the percentage to the down side of the crosshair tool shows you the probability of this price being below 3445.

Now, this is going to be pretty useful because here are your values, your percentage values of your offset in the market and this is how your going to use the probability analysis. You’re going to hover your mouse over the intersection of the oval curve and the offset, and you’re going to see that we have a better chance of being above the 4024 than we are of being below 4024 by November 25th. And if you hover over the intersection, we have a better probability of being below 4944 than we are of being above. Now, you are going to use this because you want to see if this trade is going to be profitable in the long run. And right here, below the graph, you can see that we have a 4.16% chance of being above 4910 by tomorrow, and we have a 5.14% chance of being below 4028 by tomorrow, okay? Remember, the price is the current market price which is 4443. And right here you can see the probability of being between 4442 and 4910 and below or between 4028 and 4424. So by looking at this percentages, you can see if being long crude oil right now is going to be profitable in the long run or not. And by looking at this model, we can see that there’s a better percentage or a better probability of crude oil being above our entry price so this is actually a profitable position.


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Adam is an experienced financial trader who writes about Forex trading, binary options, technical analysis and more.

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