Recruitment of participants Probability Cone backtest indicator

Probability Cone backtest indicator

The Probability Cone indicator uses statistical data to predict future price range with specified probability and implied volatility.
It plots a standard deviation curve designating ranges within which prices are predicted.

Thinkorswim has a Probability Analysis tool which is very popular for option trading.

It also has a chart study (ProbabilityOfExpiringCone) that can plot Probability Cone on the most recent bar.

The limitation of the Probability Cone provided by Thinkorswim is that we can only view the cone on the last bar.
It is impossible to know the relative position of current price and previous Probability Cones.

The purpose of this indicator is to give us the ability to back test the Probability Cone.

Features and inputs

1. Probability: The probability with which price will stay within the calculated range.
2. Bar: the number of bars used to shift backward.
3. Implied volatility(IV): the value of implied volatility to calculate the cone.
4. It only works on Daily, Weekly and Monthly timeframes.
5. It works for all kind of securities, not only Stock, but also Forex and Futures.

For example, if we have Probability=68.3, IV=0.11 and Bar =20.

The Probability Cone will be calculated and plotted from 20 bars back of the last bar on chart.

Normally, the Probability Cone is used for stock options analysis, but we can also use it in Forex.

The chart shown in below is a perfect example of applying it on FX.

When I test this indicator, I noticed that sometimes we can get better results if we plot the cone from previous swing high and low.





The extension lines of two Cones may form a support and resistance zone.