Merrill MW Waves
by Arthur A. Merrill, C.M.T.
Suppose prices have been moving in a certain way. What are the probabilities for future prices? You
must look to the past for similar situations.
How similar must the past situation be? If you ask your computer to search a historical database for an
exact copy of a current price swing, it will have a difficult time. Suppose it succeeds in finding a
duplicate situation, and you see that the market rose after the past price swing. Does this mean that now
we can count on a sure rise, with 100% probability? Of course not. The evidence is insufficient; it's called
anecdotal evidence. If a coin turns up heads one time, it isn't a sure probability for another heads next
To assess the true probability of possible outcomes for the current price pattern, you can't ask the
computer for an exact duplication of the pattern. The situation must be similar, but not exact. Your
computer must be able to find enough occasions to indicate a bias in the situation, and it needs enough
occasions to formulate a probability for the future. For example, if prices rose 40 times and declined five
times after a similar price pattern in the past, the probabilities for the current price swing would be 40/45,
Of course, the past moves may have been the result of simple chance. To check this, you can use a
statistical test called chi square. You'll find it described in any statistical textbook.