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Monte Carlo Future Moves [ChartPrime]
ORIGINS AND HISTORICAL BACKGROUND:
Prior to the the advent of the Monte Carlo method, examining well-understood deterministic problems via simulation generally utilized statistical sampling to gauge uncertainty estimations. The Monte Carlo (MC) approach inverts this paradigm by modeling with probabilistic metaheuristics to address deterministic problems. Addressing Buffon's needle problem, an early form of the Monte Carlo method estimated π (3.14159) by dropping needles on a floor. Later, the modern MC inception primarily began when Stanislaw Ulam was playing solitaire games while experiencing illness and recovery.
Ulam further developed, applied, and ascribed "Monte Carlo" as a classified code name to maintain a level of secrecy for the modern method applications during collaborative investigations on neutron diffusion and collision intricacies with John von Neumann. Despite having relevant data, physicist's conventional deterministic mathematical methods were unable to solve mysterious "neutronion problems". Monte Carlo filled in the gaps necessary to resolve this perplexing neutron problem with innovative statistics, and the resilient MC continues onward to have diverse application in many fields of science. MC also extends into the realm of relevance within finance.
APPLICATION IN FINANCE:
Building on its historical roots, the Monte Carlo method's transition into finance opened new avenues for risk assessment and predictive analysis. In financial markets, characterized by uncertainty and complex variables, this method offers a powerful tool for simulating a wide range of scenarios and assessing probabilities of different outcomes. By employing probabilistic models to predict price movements, the Monte Carlo method helps in creating more resilient and informed trading strategies. This approach is particularly valuable in options pricing, portfolio management, and risk assessment, where understanding the range of potential outcomes is crucial for making sound investment decisions. Our indicator utilizes this methodology, blending traditional financial analysis with advanced statistical techniques.
THE INDICATOR:
The Monte Carlo Future Moves (ChartPrime) indicator is designed to predict future price movements. It simulates various possible price paths, showing the likelihood of different outcomes. We have designed it to be simple to use and understand by displaying lines indicating the most likely bullish and bearish outcomes. The arrows point to these areas making it intuitive to understand. Also included is extreme price levels shown in blue and yellow. This is the most likely extreme range that the price will move to. The outcome distribution is there to show you the range of outcomes along with a visual representation of the possible future outcomes. To make things more user friendly we have also included a representation of this distribution as a background heatmap. The brighter the price level, the more likely the price will end at that level. Finally, we have also included a market bias indication on the side that shows you the general bullish/bearish probabilities.
HOW TO USE:
To use this indicator you want to first assess the market bias. From there you want to target the most likely polar outcome. You can use the range of outcomes to assess your risk and set a stop within a reasonable range of the desired target. By default the indicator projects 10 steps into the future, however this can be easily adjusted in the settings. Generally this indicator excels at mid-term estimations and may yield inconclusive results if the prediction period is too short or too long. You can change the granularity of the outcomes to give you a more or less detailed view of the future. That being said, a lower resolution can make the predictions less useful while a higher resolution can give you a less useful picture. If you decide to use a higher resolution we have included an option to smooth the final result. This is intended to reduce the uncertainty and noise in the predicted outcomes. It is advised to use the minimum level of smoothing possible as a high level of smoothing will greatly reduce the accuracy.
INPUT SECTION:
Derivative Source changes how the indicator sees the price movements. When you set this to Candle it will use the difference between the open and close of each candle. If set to Move, it will use the difference between closing prices. If you are in a market with gaps, you might want to use Candle as this will prevent the indicator from seeing gaps.
Number of Simulations is a crucial setting as it is the core of this indicator. This determines the number of simulations the indicator will use to get its final result. By default it is set to 1000 as we feel like that is around the minimum number of simulations required to get a reasonable output while maintaining stability. In tests the maximum number of simulations we have been able to consistently achieve is 2000.
Lookback is the number of historical candles to account for. A lookback that is too short will not have enough data to accurately assess the likelihood of a price movement, while a period that is too large can make the data less relevant. By default this is set to 1000 as we feel like this is a reasonable tradeoff between volume of data and relevance.
Steps Into Future is the prediction period. By default we have picked a period of 10 steps as this has a good balance between accuracy and usability. The more steps into the future you go, the more uncertain the future outcome will be.
Outcome Granularity controls the precision of the simulated outcomes. By default this is set to 40 as its a good balance between resolution and accuracy.
Outcome Smoothing allows you to smooth the outcome distribution. By default this is set to 0 as it is generally not needed for lower resolutions. Smoothing levels beyond 2 are not recommended as it will negatively impact the output.
Returns Granularity controls the level of definition in the collected price movements. This directly impacts indicator performance and is set to 50 by default because its a good balance between fidelity and usability. When this number is too small, the simulations will be less accurate while numbers too large will negatively impact the probabilities of the movements.
Drift is the trend component in the simulation. This adds the directionality of the simulations by biasing the movements in the current direction of the market. We have included both the standard formula for drift and linear regression. Both methods are well suited for simulating future price movements and have their own advantages. The drift period is set to 100 by default as its a good balance between current and historical directionality. You may want to increase or decrease this number depending on the current market conditions but it is advised to use a period that isn't too small. If your period is too small it can skew the outcomes too much resulting in poor performance. When this is set to 0 it will use the same period as your lookback.
Volatility Adjust, adjusts the simulation to include current volatility. This makes sure that the price movements in the simulation reflects the current market conditions better by making sure that each price move is at least a minimum size.
Returns Style allows you to pick between using percent moves and log returns. We have opted to make percent move the default as it is more intuitive for beginners however both settings yield similar results. Log returns can be less cpu intensive so it might be desirable for longer term predictions.
Precision adjusts the rounding of used when collecting the frequency of price movement sizes. By default this is set to 4 as its is fairly accurate without impacting performance too much. A larger number will make the indicator more precise but at the cost of cpu time. Precision levels that are too small can greatly reduce the accuracy of the simulation and even break the indicator all together.
Update Every Bar allows you to recalculate the prediction every bar and is there for you if you want to strictly use the market bias. It is not recommended to enable this feature but it is there for flexibility.
Side of Chart allows you to pick what side of the price action you want the visuals to be on. When its set to the right everything will be to the right of the starting point and when its set to Left it will position everything to the left of the starting point.
Move Visualization is there to give you an arrow to the most likely bullish and bearish moves. It is meant as a visual aid and visualization tool. The color of these arrows use the same colors as the distribution.
Most Likely Move is a horizontal line that indicates the most likely move. It is positioned in the same location as the Move Visualization.
Standard Deviation is horizontal lines at the extremities of the simulated price action. These represent the most likely range of the future outcomes. You can adjust the multiplier of the standard deviation but by default it is set to 2.
Most Likely Direction is a vertical bar that shows you the sum of the up and down probabilities. It is there to show you the bias of the outcomes and guide you in decision making.
Max Probability Zone is a horizontal line that highlights the location of the highest probability move. You can think of it almost like the POC in a volume distribution but in this case it is the "most likely" single outcome.
Outcome Distribution allows you to toggle the distribution on or off. This is the distribution of all of the simulated outcomes. You can toggle the scale width of the distribution to fit your visual style.
Distribution Text toggles the probability text inside of the distribution bars. When you have a large number for the outcome granularity this text may not be visible and you may want to disable this feature.
Background is a heatmap of the outcome distribution. This allows you to visualize the underlying distribution without the need for the distribution histogram. The brighter the color, the more likely the outcome is for that level. It can be useful for visualizing the range of possible outcomes.
Starting Line is simply a horizontal line indicating the starting point of the simulation. It just the opening price for the starting position.
Extend Lines allows you to extend the lines and background past the prediction period.
CONCLUSION:
With its intuitive visuals and flexible settings, the Monte Carlo Future Moves (ChartPrime) indicator is practice and easy to use. It brings clarity to price movement predictions, helping you to build confidence in your strategies. This indicator not only reflects the evolution of technical analysis but also touches on data-driven insights.
Enjoy
Prior to the the advent of the Monte Carlo method, examining well-understood deterministic problems via simulation generally utilized statistical sampling to gauge uncertainty estimations. The Monte Carlo (MC) approach inverts this paradigm by modeling with probabilistic metaheuristics to address deterministic problems. Addressing Buffon's needle problem, an early form of the Monte Carlo method estimated π (3.14159) by dropping needles on a floor. Later, the modern MC inception primarily began when Stanislaw Ulam was playing solitaire games while experiencing illness and recovery.
Ulam further developed, applied, and ascribed "Monte Carlo" as a classified code name to maintain a level of secrecy for the modern method applications during collaborative investigations on neutron diffusion and collision intricacies with John von Neumann. Despite having relevant data, physicist's conventional deterministic mathematical methods were unable to solve mysterious "neutronion problems". Monte Carlo filled in the gaps necessary to resolve this perplexing neutron problem with innovative statistics, and the resilient MC continues onward to have diverse application in many fields of science. MC also extends into the realm of relevance within finance.
APPLICATION IN FINANCE:
Building on its historical roots, the Monte Carlo method's transition into finance opened new avenues for risk assessment and predictive analysis. In financial markets, characterized by uncertainty and complex variables, this method offers a powerful tool for simulating a wide range of scenarios and assessing probabilities of different outcomes. By employing probabilistic models to predict price movements, the Monte Carlo method helps in creating more resilient and informed trading strategies. This approach is particularly valuable in options pricing, portfolio management, and risk assessment, where understanding the range of potential outcomes is crucial for making sound investment decisions. Our indicator utilizes this methodology, blending traditional financial analysis with advanced statistical techniques.
THE INDICATOR:
The Monte Carlo Future Moves (ChartPrime) indicator is designed to predict future price movements. It simulates various possible price paths, showing the likelihood of different outcomes. We have designed it to be simple to use and understand by displaying lines indicating the most likely bullish and bearish outcomes. The arrows point to these areas making it intuitive to understand. Also included is extreme price levels shown in blue and yellow. This is the most likely extreme range that the price will move to. The outcome distribution is there to show you the range of outcomes along with a visual representation of the possible future outcomes. To make things more user friendly we have also included a representation of this distribution as a background heatmap. The brighter the price level, the more likely the price will end at that level. Finally, we have also included a market bias indication on the side that shows you the general bullish/bearish probabilities.
HOW TO USE:
To use this indicator you want to first assess the market bias. From there you want to target the most likely polar outcome. You can use the range of outcomes to assess your risk and set a stop within a reasonable range of the desired target. By default the indicator projects 10 steps into the future, however this can be easily adjusted in the settings. Generally this indicator excels at mid-term estimations and may yield inconclusive results if the prediction period is too short or too long. You can change the granularity of the outcomes to give you a more or less detailed view of the future. That being said, a lower resolution can make the predictions less useful while a higher resolution can give you a less useful picture. If you decide to use a higher resolution we have included an option to smooth the final result. This is intended to reduce the uncertainty and noise in the predicted outcomes. It is advised to use the minimum level of smoothing possible as a high level of smoothing will greatly reduce the accuracy.
INPUT SECTION:
Derivative Source changes how the indicator sees the price movements. When you set this to Candle it will use the difference between the open and close of each candle. If set to Move, it will use the difference between closing prices. If you are in a market with gaps, you might want to use Candle as this will prevent the indicator from seeing gaps.
Number of Simulations is a crucial setting as it is the core of this indicator. This determines the number of simulations the indicator will use to get its final result. By default it is set to 1000 as we feel like that is around the minimum number of simulations required to get a reasonable output while maintaining stability. In tests the maximum number of simulations we have been able to consistently achieve is 2000.
Lookback is the number of historical candles to account for. A lookback that is too short will not have enough data to accurately assess the likelihood of a price movement, while a period that is too large can make the data less relevant. By default this is set to 1000 as we feel like this is a reasonable tradeoff between volume of data and relevance.
Steps Into Future is the prediction period. By default we have picked a period of 10 steps as this has a good balance between accuracy and usability. The more steps into the future you go, the more uncertain the future outcome will be.
Outcome Granularity controls the precision of the simulated outcomes. By default this is set to 40 as its a good balance between resolution and accuracy.
Outcome Smoothing allows you to smooth the outcome distribution. By default this is set to 0 as it is generally not needed for lower resolutions. Smoothing levels beyond 2 are not recommended as it will negatively impact the output.
Returns Granularity controls the level of definition in the collected price movements. This directly impacts indicator performance and is set to 50 by default because its a good balance between fidelity and usability. When this number is too small, the simulations will be less accurate while numbers too large will negatively impact the probabilities of the movements.
Drift is the trend component in the simulation. This adds the directionality of the simulations by biasing the movements in the current direction of the market. We have included both the standard formula for drift and linear regression. Both methods are well suited for simulating future price movements and have their own advantages. The drift period is set to 100 by default as its a good balance between current and historical directionality. You may want to increase or decrease this number depending on the current market conditions but it is advised to use a period that isn't too small. If your period is too small it can skew the outcomes too much resulting in poor performance. When this is set to 0 it will use the same period as your lookback.
Volatility Adjust, adjusts the simulation to include current volatility. This makes sure that the price movements in the simulation reflects the current market conditions better by making sure that each price move is at least a minimum size.
Returns Style allows you to pick between using percent moves and log returns. We have opted to make percent move the default as it is more intuitive for beginners however both settings yield similar results. Log returns can be less cpu intensive so it might be desirable for longer term predictions.
Precision adjusts the rounding of used when collecting the frequency of price movement sizes. By default this is set to 4 as its is fairly accurate without impacting performance too much. A larger number will make the indicator more precise but at the cost of cpu time. Precision levels that are too small can greatly reduce the accuracy of the simulation and even break the indicator all together.
Update Every Bar allows you to recalculate the prediction every bar and is there for you if you want to strictly use the market bias. It is not recommended to enable this feature but it is there for flexibility.
Side of Chart allows you to pick what side of the price action you want the visuals to be on. When its set to the right everything will be to the right of the starting point and when its set to Left it will position everything to the left of the starting point.
Move Visualization is there to give you an arrow to the most likely bullish and bearish moves. It is meant as a visual aid and visualization tool. The color of these arrows use the same colors as the distribution.
Most Likely Move is a horizontal line that indicates the most likely move. It is positioned in the same location as the Move Visualization.
Standard Deviation is horizontal lines at the extremities of the simulated price action. These represent the most likely range of the future outcomes. You can adjust the multiplier of the standard deviation but by default it is set to 2.
Most Likely Direction is a vertical bar that shows you the sum of the up and down probabilities. It is there to show you the bias of the outcomes and guide you in decision making.
Max Probability Zone is a horizontal line that highlights the location of the highest probability move. You can think of it almost like the POC in a volume distribution but in this case it is the "most likely" single outcome.
Outcome Distribution allows you to toggle the distribution on or off. This is the distribution of all of the simulated outcomes. You can toggle the scale width of the distribution to fit your visual style.
Distribution Text toggles the probability text inside of the distribution bars. When you have a large number for the outcome granularity this text may not be visible and you may want to disable this feature.
Background is a heatmap of the outcome distribution. This allows you to visualize the underlying distribution without the need for the distribution histogram. The brighter the color, the more likely the outcome is for that level. It can be useful for visualizing the range of possible outcomes.
Starting Line is simply a horizontal line indicating the starting point of the simulation. It just the opening price for the starting position.
Extend Lines allows you to extend the lines and background past the prediction period.
CONCLUSION:
With its intuitive visuals and flexible settings, the Monte Carlo Future Moves (ChartPrime) indicator is practice and easy to use. It brings clarity to price movement predictions, helping you to build confidence in your strategies. This indicator not only reflects the evolution of technical analysis but also touches on data-driven insights.
Enjoy
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