About 6 years ago, we were approached by a leading Day-Trader and requested to develop a system to predict the maximum and minimum prices of stocks within one day of trading. Initially, the request was to build on the Finsight software developed jointly by the Financial Times Group and Intera Information Technologies Limited. The system had been developed from a classical approach to handling Chaotic Systems (State Space Embedding). We negotiated rights to the system, but it proved impossible to access. Accordingly, we developed a similar system based on open literature publications. However, the resulting system did not perform better than the simple yardstick of the opening price +/– half the average daily price movement. We built a marginally better system based on a statistical tool that we had developed for the process industries. The objective of the tool was to assess the impact of random variations in raw material specification on product quality. The resulting system showed promise in that the predictions were better than random. However, we judged that they would be of only marginal value to day traders. We went back to first principles to study the actual statistics that describe stock-market price movements. We found that they are not described by any of the standard statistical distributions (Gaussian, Log-Normal, Negative Exponential, Weibull etc). They are described by a new distribution function not previously described in the literature. To date, we have found that every one of hundreds of price series that we have studied are described by the same 2-parameter distribution function. We have processed millions of stock market statistics over the years to draw our conclusions. We find that, contrary to the usual perception, prices do NOT move as a random walk.

Based on our new understanding, we have developed a new stock-market price-prediction system. It is developed and marketed with our Canadian partners Sherwood Systems Group. The system is unique in that, it provides users with statistics on likely movement direction and extent, rather than simply giving predicted values. This characteristic makes it slightly more difficult to use. Nevertheless, it is proving popular with sophisticated traders. It is now one of the most popular systems with thousands of users. Details, and a download facility, can be found on http://www.tomorrowsprices.com