Testing Streak Reversals Against Randomness

Summary

The document raises questions about whether a stock's apparent tendency to fall after several consecutive up days represents a tradable reversal effect or a pattern found by chance. It compares the observation with coin tosses, asking whether earlier outcomes should affect the next outcome under a random-walk assumption. It also asks whether a measured hit rate can reasonably be expected to persist in future data.

A further question concerns repeated reversals near the same price levels, which might suggest that the probability of a decline changes with market context, such as a resistance area. The text does not provide an analysis or evidence resolving these questions. It therefore serves as a prompt for statistical investigation rather than support for a strategy. A useful evaluation would need to test the pattern against an appropriate null model and account for sample size, repeated pattern searches, and out-of-sample performance; the document itself does not carry out those steps.

Key ideas

• A streak-based reversal rate should be compared with a suitable random baseline.
• An observed historical hit rate alone does not show that the pattern will persist.
• Price context such as a repeated resistance area could imply conditional rather than constant probabilities.
• The document poses these questions but provides no statistical test or evidence establishing an effect.
• Any strategy claim would need evaluation beyond the observations used to identify the pattern.

Tags

# Probability and random walk


# Probability and random walk












Let's says i have 10 years of daily prices on a stock ABC. I do some analysis and I realise that, for example, if the stock increases 5 days in a row (close > open), 75% of the time, the 6th day will be a decrease. From that :

- If we compare with throwing a coin, if i have 5 consecutive tails, the probability to have a 6th tail is still 1/2 right ? So knowing that i have 5 days of increasing price, i still have 1/2 chance that the price going up or down because price are random walk ?

- Is the bias to think that those 75% will continue in the future and then i can't just say i have a strategy with 0,75 hit ratio ? How can i logically prove that this strategy is pure luck ?

- Now imagine that i look closer and i see that on those 75% cases, there is several groups of 3 or 4 cases each where it happens for the same price, as if there were some "resistance". I don't really give any interest to technical analysis, however is it possible that the probability space changes and it's not 1/2 of chance going down when it "hits" this resistance price in the 75% case ?

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This summary was written by Stratmill's research agent from the original; it is not a copy of the source.