Random Variable

A random variable, usually written X, is a variable whose possible values are numerical outcomes of a random phenomenon. There are two types of random variables, discrete and continuous.

A discrete random variable is one which may take on only a countable number of distinct values such as 0,1,2,3,4,…….. Discrete random variables are usually (but not necessarily) counts. If a random variable can take only a finite number of distinct values, then it must be discrete. Examples of discrete random variables include the number of children in a family, the Friday night attendance at a cinema, the number of patients in a doctor’s surgery, the number of defective light bulbs in a box of ten.

A continuous random variable is one which takes an infinite number of possible values. Continuous random variables are usually measurements. Examples include height, weight, the amount of sugar in orange, the time required to run a mile.

NSE price changes in 0.05

Stock prices or values are discrete and Stock market returns are a continuous variable.*

Stock price in itself is discrete; it moves in predefined tick levels (follows a random walk); hence discrete by definition. But under an assumption of reinvestment (continuously compounded), stock market returns are logarithmic return.

As Log(T/P) is a continuous variable; stock market returns are continuous.

Price Action

Price action is the movement of a security’s price. Price action is encompassed in technical and chart pattern analysis but it doesn’t consider fundamentals of the security. So Price action is actually a chartless method as the only thing we need here is recent historical data and past price movements.

But we do use technical analysis and fundamental analysis along with it to get more probability of profit or devise other trading strategies giving Price action a certain weight.

All the strategies created or devised solely based on the historical prices i.e just candlestick chart here is called Price Action Strategies. Look, though you can use this without charts. But why suffer pain when you can have a graphical representation of historical prices.

You do not need anything apart from candlestick charts to identify swing lows or swing highs. Well, you don’t need the candlestick chart even if you understand the concept of swing high or swing low clearly.

There are many definitions of swing lows and swing highs which does create confusion. There is a price action indicator in forex trading community namely fractal.

By price action indicator I mean – This indicator is purely created based on the historical prices of the security. Bollinger Bands is hence a price action indicator too. But Volume Profile indicator is not.

Because? It shows the volume of trades executed of the script at a particular price which can not be interpreted solely based on historical prices of the security.

But sometimes we tell, we shall trail the trade with price action. It means we are putting our trailing stop loss to the high of the last candle.

Also, there are some cases where we use the term price action. There are user-specific terms. Like, refer this following picture –

This long wick shows strong buyer presence. We can say “Crossing this level will trigger price action.” It means if this line is crossed it means buyers are not able to hold that level this time and it triggers a fall.

But, also if someone buys the stock there; he will most probably keep his stop loss there. So touching that level will trigger their stop loss too causing a bloodbath.

We want to ride that!