top of page # How Does QuantDirection use Computational Statistics to derive Probabilities?

Correlation and probability are distinct concepts that relate to data analysis and machine learning - a key component used in artificial intelligence models

Correlation:

Correlation is the fundamental measuring stick we use to forecast probability because it measures the statistical relationship or association between two or more variables such as a share price opening at a certain level on one day and price closing at another level on another day. It quantifies how changes in one variable correspond to changes in another variable. Correlation is used to determine the strength, direction, and significance of the relationship between variables.

In the case of price movements, QuantDirection measures the common frequencies of a particular price condition's behavior. The most common measure of correlation is the correlation coefficient, which ranges from -1 to 1. A correlation coefficient of 1 represents a perfect positive correlation - the price condition moves the same way, every time. A coefficient of -1 represents a perfect negative correlation - the price condition never behaves as expected, and 0 represents no correlation, aka randomness. Probability:

Probability, in the context of statistics, is a measure of the likelihood of an event occurring. It quantifies the chance or probability of a specific outcome or event happening. Probability is expressed as a value between 0 and 1, where 0 indicates impossibility (an event cannot occur), and 1 indicates certainty (an event is guaranteed to occur).

For instance, if you toss a fair coin, the probability of it landing on heads is 0.5 (or 50%), and the probability of it landing on tails is also 0.5 (or 50%) or 'random'. We could also say that the side the coin starts on and the side the coin lands on have a zero correlation coefficient.

Probability is used to make predictions, calculate the likelihood of different outcomes, and analyze uncertain events. It is a fundamental concept in fields such as probability theory, computational statistics, and therefore decision theory. QuantDirection assigns probabilities based on the correlations values that each price condition exhibits over time. While a .50% correlation is technically random, QuantDirection focuses on those price conditions which are either above .65 correlation or below -.35 correlation.

QuantDirection Probability Forecasting:

Both correlation and probability are fundamental tools because they enable us to see relationships between variables & events. Correlation examines the degree and direction of the relationship between two variables, while probability measures the likelihood or chance of an event occurring.

Both correlation and probability require some interpretation to derive meaningful insights.

In summary, correlation measures the relationship between variables, whereas probability quantifies the likelihood of an event occurring. Correlation focuses on the association between variables, while probability deals with the chance of specific outcomes happening. Both concepts are essential in data analysis and statistical inference, but they address different aspects of the data and have distinct applications.

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