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picking winning stocks

The probability of a stock going up is equal to it going down.

Don't believe it? It is a common misconception that stocks are more likely to go up than down. After all, the stock market has risen steadily over time, hasn't it? The performance of the stock market is commonly measured by the performance of one or more indexes. The most popular, the Dow Jones Industrial Averages, has posted an effective gain of 6.4% annually between 1956 and 2006. But the index doesn't measure the performance of the stock market, it only measures the performance of 30 pre-selected stocks. When one or more of those stocks fail to meet certain requirements they are removed from the index. But what about the companies that went bankrupt, were de-listed, merged or bought out by other companies? They are typically removed from the Dow Jones Industrial Average long before they are de-listed. What would the value of the Dow Jones Industrial Average be now if stocks like Bethlehem Steel, Eastman Kodak, and Woolworth were still weighted into the average?

Probability of a stock's future price

In an efficient market, the demand from buyers of a stock has reached an equilibrium with the supply from sellers, and that point of equilibrium is the current trading price. Is it more likely that the next trade in any stock will move the price of that stock up or down?

Believe it or not, option pricing models are based on the premise that the probability of a stock going up is equal to it going down. The probability can be illustrated with a traditional bell curve. The highest probability is that the price of a stock will be at or near it's current price in the future, and it's less likely that a stock's price will experience a significant change in either direction.

Don't foolishly trade stocks under the assumption that a stock is probably going to go up (or down). You're only likely to be right half the time.

Data Provided by HistoricalOptionData.com
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