Scenario analysis
Why do traders plan for several possible paths through a week instead of betting on one forecast?
In plain words
Scenario analysis means setting out a small set of plausible paths a market could take and working out how a position would behave on each. It replaces a single price forecast with several branches, each carrying its own size, stop and outcome.
Why it matters
Markets routinely deliver both a sharp rally and a sharp reversal within a few days, so one central forecast rarely describes what actually happened. Thinking in scenarios keeps a position sized for the paths that hurt it, not only the path that seemed most likely.
In a real week: ETH, week of 6 April 2020
In the week of 6 April 2020, ETH opened at 142.69, rose to a high of 176.22 on Tue 7 April at 00:00 UTC, then fell to close at 158.59. The best day was 20.06% on 2020-04-06 and the worst day was -6.93% on 2020-04-10; the week's high-low spread, measured against the low of 142.60, was 23.58%. A plan built only on the upside branch, or only on the reversal branch, would have mispriced the week.
A common mistake
Treating scenarios as a ranked forecast, where one branch is picked and the rest are set aside. The branches come without stated odds; their value is in testing a position against each one.