CHAPTER 3
Volatility Scoring
However, the fact is often lost sight of that there is an important distinction between valid prediction in the sense of a prediction being true, and valid prediction in the sense of a prediction being justifiable upon the basis of the available evidence and the accepted rules of inference.
—Walter A. Shewart, Statistical Method from the Viewpoint of Quality Control
When we employ a scoring system to quantify the market data available to us, our goal is to establish some structure around the current trading activity. Our decision of what and when to buy and sell is guided in part by that structure. Though that may look like we're attempting to predict the future, we're always careful to distinguish between careless prediction and thoughtful projection. This may sound like we're parsing words, but it is an important distinction. As we've previously noted, market pricing often tends to move in fairly well-defined waves. During those periods, if you can identify the direction and shape of the waves, you are better able to make trading decisions while the wave lasts. As Walter A. Shewart indicates in the opening quote, being wrong does not negate the validity of your analysis. It provides an opportunity for you to review the available evidence (market data) and your rules of inference (analysis and application of market data). However, the fact that your prediction may be justifiable yet incorrect is why every trader needs a strict risk management discipline. ...
