Forecasting With Maximum Entropy
by Jack K. Hutson and Anthony W. Warren, Ph.D.
The most obvious ability that stock or commodity buyers and sellers wish for is foresight. If there was
a method or technique that we could use to predict what tomorrow will bring in the market, all our
problems would be solved. There are people everywhere that believe one prediction method or another
has some validity in forecasting market behavior. I will not claim to know a method that is better than
everyone else's nor claim that our method is better than all others. But, I will say, "This forecasting
method is statistically consistent with past price history"!
Forecasting based on past price data can be very enlightening or can be disappointing. There is always
enough history to draw some conclusion about probable future stock price activity. The best of forecasts
will have some degree of uncertainty. Maximum Entropy Method forecasts, with our computer
implementation, are as good as can be expected, based soley on past price information. The amount of
data used to forecast must be chosen with some care and common sense.