From: John Conover <john@email.johncon.com>

Subject: Re: What does the phrase "likelihood of an up movement" for a stock mean?

Date: 28 Aug 1999 06:22:58 -0000

John Conover writes: > > Someone ask the relationship between the Shannon Probability and the > likelihood of an up movement in the value of a stock. The Shannon > Probability, P, is calculated by finding the average, avg, and the > root mean square, rms, of the marginal increments in the value of a > stock: > > avg > --- + 1 > rms > P = ------- > 2 > > where the t'th marginal increment at time t is: > > V - V > t t - 1 > ----------- > V > t - 1 > > ie., today's marginal increment in the value of a stock is today's > value, minus yesterday's, divided by yesterday's. > And that is the way the tsinvest program works, (well, it does a few more things, but that's the gist of it.) You can do it in Excel, or other spread sheet, too. You can get the daily closes of stocks from many sites on the Internet, like the investment section of Yahoo!, for example. The other formula needed is for the gain, G, in value of a stock: P 1 - P G = (1 + rms) * (1 - rms) and that is what a decision to invest in a stock would be based on, (larger G is better, of course.) Its a compound interest type of thing, ie., if you measure the avg and rms of stocks by the day, a typical value of G would be 1.0004. So, to get the growth for a year of 253 trading days: 253 1.0004 = 1.1065, or about 10.6% growth per year. Again, which can be done in a spread sheet. Note that it can be automated, and a lot of stock picking these days is done by machine ... John -- John Conover, john@email.johncon.com, http://www.johncon.com/

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