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Introduction

 


What is the Market Direction Predictor behind perdictionwizard.com?
Believe or not to believe, this is the question?

What is the Market Direction Predictor behind perdictionwizard.com?

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It is part of a bigger analytical  and trading supporting program system.
It  gives  information about future market direction.
The original idea of the system is from 1997.
The system design started in 1998,  coding and implementation started in 1999. But it was not until 2005 when we finalized  the first version of the market direction predictor. The core model of the original implementation is still intact after more than  four years.
We did not use any off-the self  trading package to create  the system, since we did not want to limit ourselves  to apply  only  previously known  technologies or methods.
The system has  historical data of  over 7000 socks (Which is all NASDAQ, NYSE and AMEX stocks)  and has  Real-Time data of  a  selected list of stocks.
The Market Direction Predictor, currently generate  directional information for the  six major  US indices on three different time-frames.
The indices currently predicted:

- NASDAQ
- S&P500 (BigCap)
- NASDAQ100
- S&P100 (Huge Cap)
- S&P400 (MidCap)
- S&P600 (SmallCap)

The three time-frames of predictions are:

- Daily predictions. Predictions calculated Today, before the close of the market day, for the next market day. We also recalculate our prediction soon after the market close, before the next market open to get the final prediction information. Daily predictions valid till the end of the next market day.

- Weekly predictions. Predictions calculated this week, usually Friday, before the market close, for the next week. These predictions are valid till the end of next week. We also recalculate the predictions after the market close  on Friday or later in the week to finalize the predictions before the next week starts.

- Monthly predictions.  Prediction calculated on the last day of the month before market close. These predictions recalculated after the market close to get the final prediction information for the next month. These predictions are valid till the end of the last trading day of the next month.

The predictor supports overnight trading.

Overnight trading is defined a bit differently  for other markets, like the money markets so  before proceeding we define  our interpretation of Overnight Trading, using the  predictor  information for  the stock indices:
Overnight trading  is  defined  as  the following  series of steps:

- Opening position(s) in response to the  predictor information soon after the information  becomes available,  either  before the regular market close  and / or soon after  the regular market close, using aftermarket  trading, but still the same  trading day. We should note here that  we consider  opening a position  before the regular market close, as we do not have exhaustive test data  available by  opening positions  after the regular market close,  even if we assume that the  profit potential  would  be similar on a longer-term basis.

- Closing the position the following day(s) after holding the position overnight. We  should state that  it could  be possible to hold  the position more than one day, even if that usually occurs  less than 10% of the cases if we are involved in  overnight trading and not swing trading or investing. To be exact  it occurs, if the next day’s movement is a strong  directional movement with only one major swing during the day, so that our positions  not  closed by our stop conditions or exit conditions and  we get a predictor information  before the close of the next day, that points to the same direction so we might decide to  hold  all or part of our position for another night. It is also possible to close the position the next day before the market opens. (Using Pre-market trading) If the market set to  open  with a big GAP in our direction than we might also decide to close  some  or all of our position  in the pre-market trading. We should note here that we suggest closing our positions during regular trading hours, as we do not have exhaustive test data  available  by closing positions  in the pre-market  trading session.

We would like to note here  for Day-Traders and Swing traders, that  overnight trading  makes it necessary to reexamine the  stop conditions, the stop  levels that  you might want to employ.
Sure it  depends a lot on the asset type you are using as the trading vehicle.
But optimally it should  be noticeably bigger than the stop  levels used during a Day-Trading session and  usually  noticeably smaller than  the stop levels used  on swing trading positions.

We suggest to consider smaller positions and less volatile asset types  to get  the comfort feeling first.

To clearly understand  the predictor we  present the following:
When we developed  the predictor in our model   we wanted to get the answer for the following question:

Assuming that  we are in the last hour of the regular  business day,  and we are overnight traders, what should we do if we want to make profit in the market the next day on a consistent basis?

And  we  expect the answer to  be one of the  following from the system:

- Prefer a Long position
- Prefer a short position
- Stay put and do Not do anything.

We must emphasize, that the question to  the predictor was Not any of the following:
- Will the market  on the following business day  close above the closing level of the current day? Or
- Will the market  on the following business day  will open  Above / Below  the closing level of
   the  Current Day? Or
- Will the market on the next  business day will close Above / Below the open of that day?

Even if  in many cases the answer  for those questions would  result  the same position, as  the answer from the predictor for  the described question.

Similarly the question we asked from the weekly predictor was:
Assuming that  we are in the last trading  day of the week,  and we are overnight traders or swing traders, what should we do if we want to make profit in the market the next week on a consistent basis?

And  again we  expect the answer to  be one of the  following from the system:
- Prefer a Long position
- Prefer a short position
- Stay put and do Not do anything.

The question and  answer was similar for  the monthly predictor.

The predictor is  NOT a direct Buy or sell signal, it is rather a much more flexible  directional information, as  the  predictor  try to quantify not only the direction of the future movement in the indices,  but also  the strength of those  directional  prediction, that is the win probability of the prediction.

Some traders, who  willing to accept  less probabilities  to win in a situation, might  be willing to go with  directional information that is  not that strong, which means lover  probability to win and smaller Win / Loss rate, but potentially results more  trade in a year and possibly  bigger overall profit.

Others might  decide to  use only the very high probability  directional information.
A third type of trader  might use only the Long or only the Short directional information as actionable information.

The current version of the predictor is already much better than we could be in our personal prediction, based on classical technical analysis, and beat us consistently over a longer period.
We believe it would beat most of the professional human players in this game.

We are very confident in the technology  developed by us and can’t imagine that human thinking  can  take correctly  into account so many different  factors affecting the markets and make  so precise objective opinion with such  a success rate   on a long–term basis.

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Believe or not to believe, this is the question?

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If the market movements would be  like a random walk,  predicting future movement would be absolutely impossible.
If we accept, that the market has rules,  and the market usually adheres those rules, than we might draw the conclusion that  predicting  market movements with good  probability  would mean, that we are modeling those  forces  and rules that move the markets  pretty well.

Many traders  stick to the old adage, that   the prediction of any future  market movement is absolutely impossible, since  there are millions of  impacts, hitting the markets continuously  and  the weight of those impact  also change in time.
This is  looking at something from the comfort  zone and not  digging into it deeply  to find the answers for the  questions.
Yes, we would say,  it is true, that the future market movement will  be impossible to predict with certainty, because that would be the end of the game.
All we can say, that our  Market Direction Predictor  currently predicts  the future market direction better than  professional  individuals would be able to do.

Of course you do not have to believe it!. 
It is enough for us if  you just raise the question, that  it might be possible to  predict the market direction with a good probability, and  spend  a few seconds every day  in the next few weeks  to  look at our numbers, our predictions well  before the market open and follow up later. You just have to believe  your eyes, that is all  we are asking.

All the other work will be done by the predictor, and  it will nicely exceed  your  expectations, that is what we are sure of.
Every time, we got engaged in a trade in any index–related asset, we implicitly try to predict the direction of the index. Though most of the time the trader just  simply  get into  a trend, once identified it and stay with the  trend, but  that could change  in the next second or any time later.

Sometimes the toughest call  to predict the market’s direction when the market is really in an indecision, moving within a tight  range.
It  is this time, when  the predictor is  probably the  most helpful to us, giving the direction information.
It might be difficult to predict a Bullish next day,  when the market is really week, or a  Bearish next day, when the  market is really strong.  But the predictor is  helpful  in these  circumstances too. Other times, calling Bullish next day amidst a strong Bull move or a Bearish next day amidst weak market periods might  be a prediction  that   players would accept  easily  as natural consequence.

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