Probability Cones

What are Probability Cones?

Probability cones are forward-projected envelopes, anchored at the current price, an entry, or an event, that show where price is statistically expected to remain at chosen confidence levels. The width scales with a volatility input, either realized volatility from recent history or implied volatility from options, and grows with the square root of elapsed time, because under independent returns the variance of the cumulative move accumulates linearly with time.

Confidence labels come from a distributional assumption. Under a normal approximation, an envelope of one standard deviation covers roughly 68 percent of outcomes and two standard deviations roughly 95 percent; cones can also be built empirically as percentile bands over Monte Carlo price paths. Real returns are fatter-tailed than normal, so actual breach rates run higher than the labels suggest, and a cone edge is a statistical boundary, not support or resistance.

How traders use it

• As an expected-move frame for options horizons: comparing a target against the cone implied by option pricing shows whether the trade needs an outsized move by the market's own estimate.
• As a realism check on stops and targets: a target sitting outside the cone for the trade's intended horizon is, under the model, a low-probability outcome, which argues for resizing the trade or allowing more time.
• As post-entry context: price hugging or escaping the cone flags a move that is large relative to the volatility regime the cone assumed, often a prompt to reassess the position.