Updated preferred direction prediction performance (From Jan. 1, 2012 - Till May. 12, 2012)
As you probably know, there are unlimited strategies, that could be built upon our Daily, Weekly,
Monthly and Omega predictions.
Every day, we publish our preferred direction (If we have one) on the predictor page.
(The prediction page is accessible to the registered users only, but Registration is currently Free!)
The current requirements to have a preferred direction are the following:
- All Daily predictions must point into the same direction.
- The Omega predictions also need to point in that direction.
- The next business day is Not a holiday, and not a weekend. We do not have preferred direction for the long weekends.
With these conditions (Which is fairly conservative.) we can have pretty high confidence in our market participation.
For the sake of examples the following table presents the days, when we had preferred direction, using these conditions:
(Note that 1, 2, 3 are Bullish predictions and - 1, -2, -3 are Bearish predictions with increasing win probability.)
We had 12 days so far in 2012, when we had preferred direction and eleven of them were winners.
That performance (11 win out of 12) is quite compelling.
The whole predictor performance, using this strategy from the beginning of 2011 can be downloaded from the „Download” section of the site.
Playing this strategy, a profit factor of 4 can easily be reached.
Professional players might even shoot for an even better performance, reaching a profit factor of 6 – 8.
How can be reached?
- By cutting losses quickly.
- By playing with different position size, and taking into account some other factors, when we open the position. Some of these factors: The direction of the trend on the daily and the hourly charts, the support and resistance levels, the direction of the weekly predicted index move and others.
- By closing the position in multiple steps, in most situation we are able to increase the total returns of the strategy, we are playing, using the overnight position.
How much profit is achievable with this simple strategy? It depends on a lot of other things. But one of the main factor is the amount of Risk that You are willing to take every time.
It can be 1 [%] 2 [%] or even higher 3 – 4 [%] per trade or more, depending on your your risk tolerance.
The high – risk acceptance could be established only by playing the leveraged asset classes like futures, options, CFD –s or leveraged ETF-s.
Since the win rate is very high, the maximum drawdown will not be more than 4 – 6 times the amount of risk, that you are willing to take every time.
You can simulate a long – term performance, if you want to write your own simulator or you can see the potentials by running simulation on the following WEB – site with your data:
http://www.verticalsolutions.com/tools/pl_forecaster_pctwins.html
The WEB site will show the forecasted profit after 100 trades.
(You just need to enter the data and press the „Forecats” botton on the screen. By pressing the „Forecast” button multiple times, you can run multiple simulations.
If, for example you enter 1000 (As the average win size is 1000 [$], the win percent as 0.8 (This is 80 [%]) and the win / loss ratio as 1.0 (Having overnight positions this could be valid. It is difficult to reach an Avg Win / Avg Loss ratio of 1.5 - 2 or better even if you are a very good trader, due to the overnight risk in the market.)
High Risk period is upon us.
We are on the view, that the current runup of the stock markets since March 2009 is a Bear market rally.
All this made possible by the FED and the US government. Without their strong market participation,
the US economy would be in severe recession.
But at the current levels the market already overvalued. Assuming that more than 30% of the S&P500 companies are banks and other financial institutions which directly profited from the easy money, that made possible for them to borrow basically at no cost and make profit without any risk.
If the government need to step in to fend off inflation and suddenly raise rates, the domino might fall within the blink of an eye.
Without bank profits, the S&P500 would be extremely overvalued, and that period might be upon us, if QE will stop.
The US consumer, which comprise two-thirds of the US economy, is not buying expensive assets like houses and others, and probably changed financial behavior for the long – term, to take much less debt, at least untill the economic uncertainty disappear. Temporary buying occurs only when helicopter Ben throw money into the hands of the average consumer.
Here we are:
Below is a picture about the city of Budapest, where our company, Prestoc Ltd. located.
It is the home of a lot of famous market players.
One of the most successful from all is the financier George Soros who was also born here and today lives in the US.
The city from the Gellért hill:
Stay tuned, as we bring you new predictions, prediction history, prediction charts, blog entries and other support to help You become a much more successful market player.
Express Your opinion, Invite your friends and enjoy the power of predictionwizard.
Trading Versus Investing
Some of the reasons and symptoms that Trading will probably be favorable at least in the next 3 – 5 years, compared to the buy and hold investment strategy:
1. The US stock market is in a secular Bear market which suggest still lower prices to come.
2. Many aspects of the economic picture changed permanently int the past 2 years which suggest, that this recession is indeed different from those recessions happened during the past 20 – 30 years.
3. The Huge government debt will Not go away. Possible not in a generation, unless the dollar completelly collapses or slowly loses its value by high inflation. This will have a very long-term effect on all economic aspetcs and will negatively impact competitiveness on the long-term untill final resolution reached.
4. Not only governments, but a relatively high percentage of households are still badly indebted. The deleveraging will take years. Households will prefer savings over spending for the long – term. Consumer consumption was the main driver of all bull markets and Today this engine is not running well.
5. Buy and hold - type retail investors lost a considerable portion of their wealth during the 2007 – 2009 period and as a consequence they will not forget this for many years and will not return to the stock market soon.
6. Many professional services, mutual funds and hedge funds are underwater so far in 2010 as many of them try to mimic the return of the S&P500 index.
7. Some of the smartest fund managers, who are thinking long-term and trying to survive in this secular bear market environment, readjust their strategies, by not expecting normal returns from the S&P500. This involves the rethinking of the Long-Only strategies, relying more on stable dividends for income, selling call options and reaping the benefits of the option premium (Time decay), buying put options for coverage against big down moves…
8. Bigger than average market volatility is here to stay for the longer term. This poses better environment for trading versus long-term invesments, and it would be more difficult to time the market participation for investors in range to down markets.
9. For Day-traders even the overnight risk eliminated, which poses the biggest risk, especialy for individual company stock holders. As we pointed out in the „Learning Center” material, many index component companies go bust during longer periods, like 10 – 20 years, even from the biggest, well established names.
10. During these markets many mutual and hedge funds are losing. Most of the winners can generate only small profits, relative to their results during Bull market periods. Very often a 2 – 3% yearly fund performance is acceptable and much fewer funds able to deliver above 8% yearly performance. Contratry to this, the trading profits can be uncomparably bigger, for savvy market players it could be much bigger, many times the returns of the big funds.
It is also true, that only a very small percentage of those traders are able to deliver that enviable performance year in year out. For those, it does not really matter, that we are in a Bull market or in a Bear market, in an up-trend or down-trend or range market. Hopefully a great percentage of those successful traders will also take advantage of the powerful trading support systems like the predictions of the predictionwizard.
The important question of taking or „Holding Overnight Position”, as a predictionwizard player.
There are many things that might affect our decision to hold a position overnight.
Some of these are as follows:
- Our risk tolerance.
- The strenght and consistency of the predictions. (Daily, Weekly, Monthly predictions, Omega predictions.) If all points to the same direction, than our confidence might be very high. If the Daily prediction and the Omega prediction points to different direction, than our confidence is smaller. If multiple major indices predicted to go in the same direction, than our confidence increases.
- World economic groth and groth stability.
- Coming economic data before next market open or after the current market close, and their importance and potential effect on the market direction.
- Company profit reports, acquisiton news, other major news affecting the profit potentials of major index components.
- General market status and market conditions.
- Other important news, like goverment actions, major chages in law, wars, terrorist attaks, access to global resources, natural disasters, international trade...
We emphasized in the „Learning center” material that predictionwizard (and probably most other prediction technologies) is not able to predict the direction of the „Overnight Gap” in the markets. The predictionwizard have a 52% probability to predict the direction of the overnight Gap correctly which is generally not a usable edge.
But the importance of the GAPs in our decision making process is high wheather to take or hold positions overnight.
With all of the help from predictionwizard we aim to reach above 80% success rate with our overnight positions, and it is possible even for the average trader with a little bit of predictor knowledge.
For this reason, before jumping into any quick conclusion, we take a closer look at the GAPs in the market.
For this demonstration I selected the NASDAQ100 following ETF (Exchange Traded Fund), the QQQQ, and created the following table with monthly GAP – related data from Nov. 2006 till May 2010. (A 43 month period, which contains Uptrending Downtrending and Range markets.)
The third column is the Total Up gaps during a specific month, the fourth column is the total down gaps during the same month, the fifth column is the total gaps during the month (Up Gaps + Down Gaps), the sixth column is the average Daily Gap during the same month, the seventh column is the average Daily range, (all in percentages) and the last column is the ratio of the Average Daily range to the Average Daily Gaps.
This important ratio (for our decision making) is also shown on the following chart:
As we can see, the Average Daily Range to Average Daily Gap ratio can widely change during longer periods, and it is usually between 2.2 and 6.2.
A value of 3 for this ratio means, that the Average Daily range in a specific period (In this case a month) is three times the size (In percentages) of the Average Daily GAP size during the same time period.
Lets examine the impact of the GAPs for our overnight positions during the last month in the table (May 2010) Average Gap size was 1.06 [%}, the Total GAP in QQQQ during 2010 May was 21.3 [%], but more than 60% of these gaps, came from GAPs on the five biggest gapping days.
A pretty good trader can make use of about 40 – 50 [%] of the average Daily range to generate profits. 40 [%] of the average Daily Trading Range in 2010 May was 0.4*3.09 = 1.236 [%]
Now If the overnight Gap is only average GAP of 1.06 [%], and it is against the direction of the actual trading position, than the trader has little chance to make a good profit on the same day.
To have a decent chance to make a profit even if the market gapping against our established overnight positions we would like to see the Average Range to Average Gap ratio at or above 3 – 3.5 level.
The median Average Daily Range to Average Daily Gap ratio is 3.55.
Obviously the bigger this ratio the better for the predictionwizard user, as overnight gapping have relatively small impact on overall success rate in that case, as the predictor is focusing on market movements when trading actually happens during normal / regular market hours.
During Oct 2008 the total GAP in QQQQ was a whopping 45.75 [%], the biggest in any month during the past 10 years.
As we can see from the table, the Total Gap in the direction of a strong trend can be 1.5 – 5 times bigger than the total Gap during the same month in the opposite direction.
So the worst play a trader can do is to play with overnight positions during strongly trending, GAPPY markets against the prevailing trend, especially when the Average Daily Range to Average Daily Gap ratio is very small, below 2.5
Though it can’t be seen from the chart, in this respect one of the worst month was May 2010, as we had one Day (May 6, 2010), when the Daily range in QQQQ was 14.1 [%], and if we exclude that day from May 2010, than the Average Daily range to Average Daily Gap ratio would have been only about 2.4, a very risky situation.
So if we have the courage to take overnight positions during GAPPY periods in a strongly trending market, than we would prefer to do it in the direction of the prevailing trend, so we need to wait for predictions in the direction of the mid–term trend, so that the potential impact of the overnight GAPs is smaller, if we consistently trade those situations.
When this Average Daily Range to Average Daily GAP ratio is above 4 – 4.5, than we have relatively great chance to make a good profit with our overnight positions.
It does not mean, that the predictor is not good at all during risky, GAPPY periods, it just mean, that our Win probability is better during normal market periods, when this range to gap ratio is relatively high.
If we would like to get a first estimate for this ratio, than it is enough to look at the option volatility indicator, the VIX data.
During High VIX market periods (VIX > 30) the above mentioned Average Daily Range to Average Daily Gap ratio is usually below average.
But we note, that relatively High VIX is not necessarily mean high Daily range, though that is the normal situation and Low VIX usually means Low Daily range , but not always. We had market periods with:
- Relatively High uncertainty (High VIX) along with High Average Dailly range: Example: Sept. 2008 – Dec. 2008
- Relatively Low uncertainty (Low VIX) along with Low Average Dailly range: Example: 1993 – 1997, 2003 – 2006
- Relatively High uncertainty (High VIX) along with Low Average Dailly range: Example: Sept. 2002 – March. 2003
- Relatively Low uncertainty (Low VIX) along with High Average Dailly range: Example: Oct. 1999 – Marc. 2000
When the VIX is high, pundits say its time to buy. But there is a big question. We do not know how long will it remain high, though we created some study to research this area too.
We also published in the „Learning center” material that the success rate of the prediction is higher in the direction of the prevailing trend. A big reason of the difference between the success rate of prediction in the prevailing trend directions and the success rate of the predictions against the prevailing trend direction is the big GAPS.
If the market experiences big opening GAP against the predicted direction, than the chance, that a specific prediction will be successful for that day is considerably smaller.
During this 43 month period we examined, 29 month or 67 [%] of the time the Total Up Gaps during a month were bigger than the Total Down Gaps during the same month. Only 14 month or 33 [%] of the time we saw Total Down Gaps bigger than Total Up Gaps during a month.
Drawing conclusion from the Predictor data.
(A simplified decision making process. )
We noted in several times, that the predictor is Not a trading system.
It gives us support in our market participation process.
As a result of the predictor data a trader get a bias in one direction or the other.
Do we act immediately and jump into the market after obtaining the predictor information?
Most probably Not.
We might take into account our experience, other information, collected during the preparation process,
and many real-time market information before pulling the trigger.
As a result of the predictor data occasionally we might have little time, to make the decision, other occasions we have plenty of time to respond / react to the development and available data.
Every Day we run the Daily predictor for the Six major US indices (NASDAQ, NASDAQ100, S&P500, S&P100, S&P400, S&P600) before market close and again after market close, to get the final conclusion.
In addition to this, we have a separate prediction, that is the output of another proprietary predictor technology that we designed as additional decision support.
We can call it “Omega Prediction”.
The most important, final conclusion drawn by us having all predictor and analysis data in our hand and in addition to that incorporating our market knowledge we write the conclusion at the end of the comment section for the Daily predictions.
That is our bias for the next day, the output of all prediction effort from using our system and our market and trading knowledge.
The simplified decision table is presented below:
The overall WIN probability is the highest for the first situation / category, and it is the lowest for the last situation / last category (Category 8)
So the categories ordered by Win probability is in descending order.
Why is this simplified?
Some of the reasons:
- It does not contain the monthly predictions that also have impact on the final decision.
- The Daily and Weekly predictions represented with only two states (Bullish / Bearish) but detailed predictions represented with Six different states (Strongly Bullish coded as 3, Bullish, coded as 2, Neutral leaning to the Bull side coded +1, Neutral leaning to the Bear side coded as -1, Bearish coded -2, Very Bearish coded as coded -3)
- The other independent prediction, the “Omega Prediction” represented with only two states (Bullish and Bearish) but actually have three states (Bullish, Bearish and Neutral)
- We have not one, but Six indices, and the predictions for all of them might not be the same, we might have divergences between the predictions for different indices. (in addition to the divergences within each index prediction, that we can see only by looking into the detailed calculation output numbers. )
- Current market action and market states (Whether the market is in a Bullish Upleg or Bearish Downleg, that will affect the weight that we apply for the weekly and Daily predictions, knowing that Bullish prediction Win probability is higher during Bullish moves and lower during Bearish moves, and vice versa, Bearish Weekly and Daily prediction Win probability is Higher during bear markets.)
- Timing of the implemented action might also depend on many other things (Scheduled and unscheduled news, profit reporting…)
With all this simplification, probably we will not make big error during long period if we just mechanically apply it, even without additional predictor experience.
When we mention “now” as our preferred action timing, than it means, we try to act right after the predictor data available and looking for opportunity for a good market entry.
We must note a few important thing about the “Omega prediction” that we also use in our decision making process (That we present in the comment section, after running the calculations the second time after market close):
- It is a proprietary technology, that has a very good predictive capability.
- It is predicting the probable index movement for the next business day.
- It is the result of an objective analysis using available real-time market data.
- This prediction technology has a bit different characteristics than the technology, presented in the table as Daily, Weekly and Monthly predictions.
This mostly means that it predicts future market behavior / market moves generally for the whole day, including the market close, and not weighted toward the period right after the predictor calculation as the other technology.
- This other prediction technology used in the “Omega Predictor” proved consistently good during uplegs and downlegs, and currently has a Win probability of 73%.
- Because of these characteristics, most of the time we can’t see during early hours,
that this type of prediction (Omega Prediction) fails, so we can’t use this prediction to
reverse our trades early in the morning, if proves incorrect as we can do sometimes
for the other predictions presented in the table.
- The other very important characteristics of the “Omega Prediction” is that it’s
Failed predictions has very low correlation with the other Daily prediction technology, used in the presented table, which is exactly what we would like to have.
This means, that much less often could fail both of the two different Daily predictions on the same day.
We constantly monitor the performance of the predictors.
Currently The Daily predictor performs a bit below historical standards, as we get more than normal bearish predictions, which fails.
(Currently performs a bit below 70% win rate for the NASDAQ index.)
Often it fails with bearish predictions during strongly up-trending markets. We know this characteristics.
For this reason we put higher weight for Bearish Daily prediction during strong up-legs only if we get a Very Bearish prediction (Coded as -3)
The weekly predictor currently performs slightly better than historical averages.
(Currently it performs with a win rate of about 85% for the NASADQ index.)
Usually it is much more difficult to mislead the weekly predictor, as we get less noise and less potential for effective market manipulation in that time-frame.
These three predictor output could be viewed as three voters.
These voters have their weight as their winning probabilities.
These three voters present eight different possibilities for us.
We can select which one to play, and what trading size to use for each of these situations.
Our confidence level will affect the selected trading size.
We might ultimately open position only in the direction, which is predicted by at least two voters.
If we are in a Bull market and all three voters point to Bullish next day, than we have the highest confidence and act accordingly.
If on the other side all three voter points to Bearish next Day during a strongly up-trending market, we know that we need to select a bit smaller trading size, as our confidence might be a bit lower.
Similarly we don’t trade, or if we do, we select the lowest trading size, if the two different technology, used to predict the Daily market moves, gives us conflicting data.
As we know the weekly predictor data has a higher weight on Fridays, after running the weekly predictor calculations, and lower weight 4 – 5 days later, after next Tuesday – Wednesday…
As a result of the predictor calculations we have a little bit of bias.
If the market proves quickly after open, that our bias is not correct, than we can either wait, or if we already have position we might decide to reverse it. (Especially if we see strong trending against the Daily prediction, presented in the table.)
During the first 120 minutes we prefer to apply a little bit higher weight for the Daily predictor, and a little bit smaller weight for the “Omega Prediction”, and later in the day a little bit smaller weight for the Daily predictor and higher weight for the “Omega Predictor”
These are rough guidelines and obviously has significance only if the two different daily predictor technology points to different direction.
Our timing of action as a response for the predictor information depend on how aggressively are we playing the market.
By accepting the overnight risk, most of the time we can reach higher profit potential, but that comes with the added risk.
In some cases, especially in the first two categories (less so for category 3 and category 4) our overnight risk is probably smaller as the theoretical win probability for those situations are above 90%.
Also our playing strategy a bit different if we are playing with overnight positions.
March 16 / 2010
Predictionwizard service improvements.
We understand the feedback from some of our readers and in response to their suggestions we will
implement the following improvements:
As we stated in the “Learning Center” material, the predictor system is part of a bigger analytical application, that
we use in our everyday market participation.
We also know, that it is not easy to make the right decision even with the predictor output in our hand.
In addition to that playing the game requires a bit different strategy, if we open a position in response to
the predictor information Today.
Another strategy, if we plan to open the position Tomorrow at the open.
Yet another, different strategy, if we try to open the position later in the day Tomorrow.
As we stated in the “Learning Center” , predictionwizard is not able to predict the overnight GAP, it is effective only during trading periods.
Many future blog entry will address the aim to improve the success rate of the predictionwizard user.
However two aspects / features of the predictor is unique and different than most of the other services available for traders. So we would like to highlight them again here:
1. The predictor is Not predicting, where the market will be at the end of the prediction period. It is predicting the probable direction, to use right at the time of the prediction or soon after that.
Due to this, a professional predictor user gets the edge, even if the prediction fails for a given day.
Most of the time, a failed Daily prediction can be identified within 30 – 90 minutes, but
very often it could be concluded even 5 – 20 minutes after the market open.
This early identification can help us to reverse existing positions (If we have already.) and often open even bigger position in the other direction.
To conclude the same thing traders might need much more time without the help from predictionwizard.
We can be sure, that if the market is not showing any willingness to move in the predicted direction usually early in the trading day (first 30 – 90 minutes), than very often something really important happened, which pushed the market out of the predicted script.
In case of neutral or low probability prediction the conclusion might be a bit more difficult to draw.
2. Every trade comes with a win probability, calculated by the system.
This is a general average win probability for similar situations.
Since the win probability calculation does not differentiate between different type of markets, we know from statistics, that the actual win probability is a few percent higher for Bullish predictions during bull markets and a bit lover during bear markets.
Similarly actual win probability for bearish predictions a few percent (1 – 5 %) higher during bear markets and (1 – 5%) lover during bull markets.
The calculated win probability can guide us to select the proper position size for our market participation.
In addition to the predictor, there are many other supportive mechanism built into the system. We can summarize them as classical technical analysis packages, whereas the predictor is a completely different technology, having few commonalities with the other methodologies.
Every day, after running the predictor calculations we present the predictor output, which is the output of the system, and comment the predictions with our interpretation, looking deeper into the predictor numbers.
What we plan to do next within this comment section is the following:
After commenting the predictor information, we lay down what we think the optimal strategy
to play having all information in our hand:
1 Predictor data with the details, and experience with that kind of data.
2. General market analysis.
3. The results of the additional classical analysis in our hand.
The second and third item will be presented / available for us only after the market close.
At the time of running the daily predictor calculations, we will state any of the following five
Steps / strategies, to respond to the predictor output.
1. Prefer opening a Long position Now (After market close.) or Tomorrow at Open.
2. Prefer opening a Long position Tomorrow after the open, possibly in the first 30 – 120 minutes during the trading day. In this case we are looking for good entry points based on other market internals, real time data…
3. Prefer opening a Short position Now (After market close) or Tomorrow at Open.
4. Prefer opening a Short position Tomorrow after the open, possibly in the first 30 – 120 minutes during the trading day. In this case we are looking for good entry points based on other market internals, real time data.
5. Prefer not to do anything now, need to WAIT till tomorrow for the market to show
Its characteristics. No planned position.
If the results of the other analysis points in the same direction as the predictor data, than we will say, we prefer to open a position Now or Tomorrow at the market open.
If the results from the other analysis points to different direction than the predictor data, than we will say, we prefer to wait, and open a position only after the market open Tomorrow, probably in the first 30 – 120 minutes.
Also experience with the predictionwizard, knowing when is it better and when is it potentially less successful will impact these comments.
If the results from the other analysis is Neutral, than the preferred action will be more based on the predictor data details.
Please note, that with this added information the predictor statistics will not change.
The only thing that might change is the success rate of the predictor player. There will be days, when the predictor information fails, but still the day could be closed profitable if we did not open position at the market close, but only after the next market open.
The reference levels for the daily predictions is the index closing levels on any given day.
Occasionally we might add, that we have low, medium or high confidence in our additional comment.
Please note that only registered users will have access to the predictor data and these comment area.
Later in the coming next few months we plan to create a kind of trading repository, that will demonstrate to predictionwizard users the way the different situations handled and played.
Stay tuned. We are committed to make small winners even bigger winners and to convert many less successful market players to winners. But we can’t say it will all come without lasting effort, commitment and dedication from the players.