Probability of Touch

Many traders fail to take probability into account and instead decide to rely purely on their own analysis of the market. Probability can provide a reasonable estimate for what to expect during a spot trade. 

 

The math and statistics involved in this section are helpful but not that complex, so even those who are not mathematically inclined shouldn’t have an issue with implementing this type of trading style. 

 

In order to get a proper probability estimate, you need 4 inputs. The current price of BTC, the price at which you plan to enter/exit (average price of where your limit orders have been placed), time remaining (input to find the probability of price reaching your target within any given time you choose), and the current volatility. Use the free probability calculator here.

 

To find current volatility, use the DVOL (the green line on the attached link). This is the Deribit implied volatility index. 

 

Implied volatility is simply the market’s forecast of an asset’s price over a year. This value can vary quite a bit over time, as you may notice IV below 50% during some days whilst on other days it can be well over 100%. The next section will go over how to deal with days when volatility is at a far elevated value. 

 

Here is an example: 

 

I sold 1 BTC at a price of 39950 USD. I then placed a bid for 1 BTC at 38950. The current implied volatility is at 82% (this IV is derived from Deribit’s ATM options). 

 

 

The implied probability that my buy order will be filled within 7 days is 82.2%. This is because the probability of any price being touched is simply 2x the lower of the two probabilities given from this calculator. Therefore, due to the fact that the probability that price is below 38950 in 7 days is 41.1%, the probability that 38950 is touched at least once within 7 days is 82.2%. 

 

This is purely a mathematical probability based on a monte carlo simulation, and needs to be balanced with your own analysis of the market (as implied volatility will likely change, as will price). However, mathematical probabilities provide a reasonable estimate for the rough odds of what to expect in the future. 

 

This probability calculator uses rounding, therefore you will see it at times give out 100% and 0% probability figures. If you want a more complex calculator, you can use this here wherein you can derive the probability of price touching any point by using 2x the delta of the call option if finding the probability of price rising to reach a certain point. Likewise, you can derive the probability of price touching any point by using 2x the delta of the put option if finding the probability of price falling to reach a certain point. 

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