by George R. Arrington, Ph.D.
A Markov chain, the concept of which was developed in 1906 by Russian mathematician A.A. Markov, is
a mathematical tool that traders might use to predict future price changes on the basis of past price
changes. STOCKS & COMMODITIES contributor George R. Arrington explains how.
A Markov chain is a mathematical tool that was developed in the early 1900s. It has been used in a
variety of applications, including but not limited to forecasting weather changes, voting patterns,
demographic trends, agricultural yields, insurance payout and even outcomes of sporting events. It is a
technique that traders can conceivably use to predict future price changes on the basis of past price
changes, to identify the probabilities of future price changes and to assess potential risk.