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5. Simulating Future Movement

We saw in the last chapter that using probabilities derived from the price change distribution was only valid for changes over a limited number of days. It is possible to construct probable movements over, say, a five-day period by taking probabilities from the individual daily changes as predicted from a normal distribution. Of course, we have already decided that daily changes are not normally distributed, but it is helpful to go through this exercise in order to clarify our thoughts about what is possible and what is not possible.

We pointed out earlier that one property of the normal distribution is that there is 95% probability that the next data point will lie within +- 2 standard deviations of the mean. ...

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