Prediction Wizard

Completing  the last two   points of the puzzle solution.

Trading and predictor knowledge and economic and market news discovery, before making the decision about overnight position and drawing some conclusion.

1.      Trading knowledge, predictor knowledge and experience.

Obviously this is a huge topic,  and trading experience can’t be replaced with  written material. So we try to cover only a few important aspects, that can help  in our decision making  whether to open overnight position or not.

-   The nature of market movements and predictor behavior.

   Markets  go through different periods in time.  If we look at

   Daily charts we see trending periods, range markets, high and

   low volatility periods…

   One of the most important areas are the turning points  on

   those daily charts.

   We noted in the learning center material that  during a long up-

   trending period we might have more Bearish Daily predictions

   than Bullish predictions. (And  during long Bear market

   periods we might have more Bullish Daily predictions.)

This is because  most of the time  even in an up-trend  the market opens lower on the next day or moves lower during the morning session of the next day,  but  often finishes the day  above the current day’s closing levels. Since the Daily predictions more effective  during the first 30 – 180 minute period of the regular market session  we might get  Bearish Daily predicted direction in Bullish, up-trending  market periods.

We also note here that during the early phase of a  direction change  or trend change  the market often  moves up / down briskly, with gaps (We consider  GAP as the difference between current Day’s close and next Day’s open but  Not necessarily opening  above / below  current Day’s high or low, that is considered by many  as Gaps.)

During the later stages of a trend and at the end of a trend we usually get much more overlapping between Daily bars / candles.

-  Market turns.

   It is crucial to pinpoint  potential market turns early  and

   correctly.

   The predictor system is doing excellent  job in  identifying

   potential market turns.

   We can  check from the predictor history (Which can be  

   downloaded from the site for every indices.) that the predictor

   system is correctly identified  most of the major turning points 

   in the market, and did it  way ahead of  the competition.

Some examples:  The predictor system correctly  predicted a  turn  on March 9-th 2009, when  we had the Bear market low in the S&P500, it predicted  the upturn on July 10 – 13-th of 2009, when most of the  professionals and market analysts predicted  Bearish Head & Shoulder continuation downward, and among others  the predictor most recently correctly predicted  a Bullish upturn on  Aug 31-th 2010 when a  multi-month rally  started  that is still in effect Today on Dec 12-th 2010.

The key however is that the predictor is Not diagnosed the turn after it happened or predicted late as most of the competition, but before  it actually happened.  This way  the predictor  players had a chance to gain 2 – 8% profit  (Playing the index – related assets without leverage.) by the time the other competitive  systems noticed the shifts in the market.

   Many of those major market turns preceded by  divergences  

   within the indices.

We would advice  not to make any trading decision based on divergences alone,  but they could be  very useful  supports and precursor of any market turns.

- FMEA  (Failure mode and Effect Analysis)

         Researchers and engineers  often use this quality assurance

         methodology to improve the quality of a service or  a product.

We also completed research  to find out how, and when do our Daily predictions Fail.

         We  identified the  five most important reasons, why a Daily

         prediction might   Fail.

Those Failure reason cover well over 80% of the Failure precedents for the Daily predictions.

These Failure reasons  listed in the  following table along with  probabilities.

From this table we can see that the simple most  important reason, a Daily prediction might Fail is:  Opening Short is a Strong Uptrend.  The 36.36% probability  means that  out of 100 Failed predictions that fall into the listed five category,  36.36%  or 36 predictions Fail  because of  this reason.

The second most often encountered  reason for a  Daily prediction to Fail is: GAP against the predicted direction.

Having this knowledge  we can easily  improve our predictor playing success rate by  adding more requirements for overnight position opening.

Since we know that playing Short in a Strong Uptrend is the toughest game,  we try to be extremely cautious.  (We know for example that 95% of the Put options  expire worthless at option expiration days…)

For example we  might require  some  combination of the following:

         - Require that along with the Daily predictions the Omega

           predictor  give us a Bearish  prediction for both the NASDAQ

           and for the S&P500 indices.

         - Require strongly overbought conditions.

- Require either a trend change to down or a Bearish cross of

   the WMA 10 / SMA10 on the hourly / Daily chart.

         - Require strong resistance levels  or possibly multiple 

           resistance levels just above current levels.

Actually adding the Omega prediction as added  requirement also help  a bit to decrease the Failure rate, related to GAP-s against  predicted direction.

I would suggest interested players to download the Prediction Charts for the Index in question and study  the  Failed cases to get a better feeling about potentials.

-  Market action during the current day.

For some players this  might effect only  the position size to be opened, for others  current Day market  action  can be a  blocking condition to open  overnight position.

To illustrate  with examples I created the following image, with different current  daily market action:

Market has a tendency to test previous day high and / or low or  the high and / or low of the previous day afternoon session.

So  for example if we get a Bullish  Daily prediction for the next day and  different kind of risk (as the image shows)  than  we might just adjust the position size, or if we estimate the risk  to be  bigger than our tolerance level, than we  do not open position.

It might also be important,  where the current price  levels are relative to the price range of the previous 1 – 5   day range.  Markets has  a tendency to make a bigger move  if we are outside of  that range  compared to the size of move staying within  the range  of  the previous 1 – 5 day.

2.      News (Scheduled news after the current Day’s close or before the next day’s market open.)

This has little  or no added value for an investor, but it can be extremely important  for the overnight  position trader.

The importance of  any  type of scheduled  news vary, as market sensitivity vary during long periods.

Economic data like GDP, PPI, CPI,  Housing – related data, Trade related data, FED – related info,  manufacturing, international trade, consumer sentiment,  retail sales, profit reporting … all can be market moving events.

Instead of  long descriptions,  I would like to highlight one example:

We often trade  NASDAQ100 – related leveraged ETF-s.

We also know, that the composition of the NASDAQ100, unlike the S&P100 which is very  diverse, and  the differences in the CAP – size of the NASDAQ100 companies are fairly big. For this reason every time, before the profit – reporting period starts  we make a list  of those scheduled report date and time for the 8 – 12 biggest capitalization  companies within the NASDAQ100.  We definitely not trade overnight positions, when  any of the biggest 8  NASDAQ100 index component report quarterly profits.

Any of the Biggest  8 index component  can move the  NASDAQ100 index by  at least 1%, so  leveraged assets can  move  2- 3% or in some cases even much more.

The first 2 – 3 weeks of any profit – reporting period might be risky, but   in some cases we saw big moves even many  weeks after the start  of the reporting season. (For example one NASDAQ100 index component,  RIMM, Research in Motion  is a Canadian company and report profits usually  well before / after the regular US profit – reporting season.)

The S&P500 is  much less dependent on any individual profit reports, and usually makes  smaller  GAP in case of  extreme reactions related to any single index component.

Summary and Conclusion:

The  articles, presented to help your decision making about overnight positions  might  seem too complex or  difficult to  learn.

It is written this way so that You can simplify  and create your own strategy and trading plan by  extracting the information that you consider most important  for your trading.

The more complex a trading strategy  or trading plan,  it is usually the less robust to use  for long periods of time, possible for many years.

We mentioned that the Daily, Weekly and Monthly predictions are extremely robust, but not optimized predictions, so they will probably be valid for very long period of time, but  little tuning can always be added, knowing that time – to time we need to reevaluate the less robust tuning aspects of any trading plan.

A plan (related to overnight position opening)  can be as simple as three steps or can be as complex as multiple pages of written actions.

Very often  some part of the decision – making process can be completed well before market close,  sometime even hours before.

In our plan we can explicitly state those situations, that we consider blocking conditions against overnight position opening.