Prediction Wizard

At the end of the day,  in the comment section of the daily predictions we write our overview for the next market day, and  occasionally we  state our preference for overnight positions.

As we are very conservative traders we do not always write preferred direction, as we estimate the risk of holding those positions overnight higher than normal. But that does not mean, that we do not have  preferred direction at all in our mind, as we  go through our decision making process.

That decision making process will be detailed in these series of blog entries,  to  help  others see, how we get to our conclusions, and  to make possible for others to make their decisions on their own based on the available data.

Solving a complex puzzle:

The decision-making process is very straightforward, but it contains both objective and  subjective components, and  this process is  not caved in stone. It is  still evolving, and  it is changing dynamically as the market changes and our knowledge about the market mechanizm  changes.

There are four  very besic pillars  of this decision making in decreasing  importance.

1.   The analysis of the current  prediction data puzzle.  This alone might take a few minutes for beginners, seconds for experienced users. In this process we analize the Daily, Weekly, Monthly  predictions for  all six major US indices, and the Omega predictions for the NASDAQ / NASDAQ100 and the S&P500 indices.  For  the predictionwizard visitor this  20 data is like a ton of information, that need to be weighted in our decision making process.  For us the picture even more complex, as we have 18 separate internal data for each predicted index, making the total number of data 18* 18 + 2 = 326.  Since this decision making process is like the analysis of a chess game situation, we need to know  and take into account statistical data, that we plan to detail.

2.   The second most important consideration  in the decision making process is the analysis of current market conditions.  It is a kind of classical technical anaysis, that either  supporting or contradicting  the prediction picture, the result of the first  process.

3.   The next factor in the decision making process  is our state of knowledge about the market and  the systems we have and use every day, which  makes our decision subjective, even though we try to stay on objective ground as much as possible. 

4.   The last factor   in our decision making process is the evaluation of the scheduled news (Mainly      economic news, like GDP, PPI... eco data, profit reporting data coming into the market before the next market open...)

With a  little bit of experience   all this decision making process takes a few minutes, usually less than 4-5 minutes, and part of the process can be completed  even before running the predictors and analyzing the puzzle, just by watching the market behavior thoughout the day and completing  classical technical analysis.

The final outcome of the decision for us will be  the opening of a position of a specific size in a specific direction or not opening any position at all. Others with different experience, different risk tolerance and different weights in their decision making process might come to completelly different conclusion.

Depending on preference  and confidence level  theoretically the position opening process could be completelly automated, semi automated or  it could be completelly intuitive.

Some professionals argue, that the actual position opening is not  very important for the overall results of a market player. We do not share that view,  as it might be because those, who say that probably have no or littlke edge  in predicting future market direction, they  focus on position management or position closing exclusively.  Those are also important, and can  add to the bottom line in case of the predictionwizard player.

As a  predictionwizard player, who intend to reap the benefits  of  the predictor system,  has to have answer for  the following very important question:

What will suggest to me to initiate an overnight position? (In some cases to close existing position before the next market open.)

The answer could be many, like the followig examples:

- Yes open position, If  a certain Daily prediction for the next day for my preferred index has a win probability, greater then X [%], X being  determined by the market player.

- Yes open position, If  a certain Daily prediction for the next day for my preferred index has a win probability, greater then X [%], X being  determined by the market player. At the same time the predictor for the other major index point to the same direction.

- Yes open position, If  a certain Daily prediction for the next day for my preferred index has a win probability, greater then X [%], X being  determined by the market player. At the same time the Omega prediction  for the same index must point in the same direction.

- Yes open position, If both Daily, weekly predictions point in the same directon, and the Omega predicton also supports that.

- Yes open position, If  the calculated win probability is greater than a specified minimum limit and there is no blocking condition. (Like incoming GDP data the next moring...or something else that you decided  not to trade)

The more stringent requirements we define for position opening, the less trade we might have during a year, and the less overall profit could be reached. There is  an optimum solution somewhere, by which we can maximize our yearly profit potential.

The next question the trader need to answer:

Having  made a decision about position opening,  how can I  select the good position size?

And the answer could vary, depending on  the way, we approach the market. Some examples:

- The position size will be a pre-specified  portion [%] of the account size.

- The position size will be set intuitively.

- The position size will be calculated, based on expected Win probability.

- The position size will be calculated, based on expected Win probability,    adjusted by the impact of recent trading results of these kind of trades.

- The position size will be calculated, based on  a complex set of rules, which  includes the estimated win probability, and depend on current market volatility.

- The position size will be calculated, based on  estimated win probability, current market volatility, and Gappiness of the recent market activity in the past 3 – 6 weeks.

By the time of these blog entry series completed, hopefully You will be better prepared to make a more informed decision  and  give the best answer for the above mentioned two questions  during your market participation.

      Enjoy Your Trading.