A Software Solution to Intermarket Analysis.
A review of VantagePoint 6.3 from Market Technologies.
Like a child at Christmas, traders enter the market with high hopes and great expectations. Among their first tasks is to find the 'best' method to trade and they may spend anywhere from six months to as much as five years in pursuit. Armed with little more than hope and a dream, they scan the literature, attend seminars, buy a truckload of books and then either choose a charting program or, for the more technically advanced, create a system that they believe suits their desired trading style.
During your first year, if you are lucky, you come to the grim realization that back-testing produces great results, especially if you fall into the curve-fitting trap. But try such a system in real time with real money and you usually get slaughtered. Indicators such as the zigzag, available in most charting programs work extremely well in back-tests, but those who use them to trade in real-time often watch helplessly as the latest reversal signal disappears and a new one forms in the same direction. Black box systems that provide little, if any, indication how signals are generated are another trap that become just one more expensive, how-not-to lesson.
Somewhere between year one and year three it begins to dawn on you that there is no such thing as the Holy Grail. With this epiphany comes a dramatic change in the trader's focus. By this time the 'get-rich-quick' crowd has become discouraged by the compounding costs of buying trading products, only to realize that they fail to do the trick as trading losses mount. Those with gambling addictions who saw trading as another way to feed their habit migrate back to online gambling sites or the casinos in search of easier money. They represent the trading dropouts. The survivors have passed the first major test, and from this group will ultimately emerge the professional traders, analysts and market wizards.
The Intermarket Analysis Realization
In 1991, John J. Murphy's book, Intermarket Technical Analysis, was published. It was the first book to detail the impact that different asset classes exerted upon one another with a myriad of examples. Murphy's next book on the topic in 2004, simply entitled Intermarket Analysis, discussed how he discovered the interplay between the four asset classes of stocks, bonds, commodities and currencies and what had changed since his first book. Although it would take a decade and the Asian flu to bring the world of traders and analysts around to his way of thinking, the discovery was to make a sizeable impact on the way professional traders looked at markets.
A pioneer software developer, Louis Mendelsohn, recognized intermarket relationships in the late 1980s and began looking at ways to incorporate them into a software application. In 1991 he first made VantagePoint available to clients. The program used a series of intermarket inputs combined with neural networks to produce trading signals. By 2004, version 6.2 produced trading signals for 46 separate markets. In September 2005, version 6.3 was released increasing the number of markets covered to 90.
How VantagePoint Works
Each market utilizes five separate neural networks to make forecasts. A neural network is a software program that is designed to function like the human brain and has the ability to "learn" from past signals by comparing patterns. This means that, as intermarket relationships or markets change, the program updates formulas. Because markets are in a constant state of flux, this quality is critical to any successful trading system. When you realize the degree of complexity involved when adding intermarket relationships to a trading system, it is easy to see the importance of utilizing a neural network or a similar dynamic approach to insure the program's long-term effectiveness and success.
VantagePoint offers the trader a number of new indicators that, unlike the lagging indicators that are prevalent in most trading programs, are instead designed to be leading indicators.
Figure 1 show the program charts the S&P500 Index on VantagePoint version 6.3. The predicted 5-day moving average (blue) line in the main graph above, predicted 5-day (cyan), predicted 10day moving average (magenta) difference lines and the Predicted Neural Index (navy blue) in the lower subgraph use proprietary inputs from the following intermarkets (see figure 2).
The specific weighting and methodologies utilized by the neural network function to produce the signals are not public knowledge, but the fact that all these markets play a role in determining the direction of the S&P Index should be of interest to all traders.
Signals on the chart above are interpreted in a manner similar to a moving average crossover and a momentum oscillator. (Note: A number of VP indicators are not shown.) When the 5-day predicted moving average crosses above the 5-day standard moving average, a buy is indicated if the signal is confirmed by positive values of the Predicted Neural Index and 5-day and 10-day predicted moving average differences (see green arrows).
|When the predicted moving average crosses below the standard moving average, the predicted 5-day and 10-day difference signals are negative and the Predicted Neural Index is zero, it's a sell or exit signal. When an oscillator (lower sub-graph of Figure 1) reaches an upper extreme, it signals an overbought condition. At the lowest extremes, the security or issue is oversold. Divergence, a powerful use of oscillators, works equally well in the case of the cyan and magenta lines above.
How does the Program Perform?
The reported accuracies of the Neural Index signals for key financial markets using VantagePoint Version 6.2 include:
The preceding values were calculated on out-of-sample data with predicted values from October 15, 2003, through October 14, 2004, according to VantagePoint Software.
Of the 90 markets offered in Version 6.3, new markets include the Continuous Commodity Index (formerly known as the CRB Index), DAX Index, Russell 2000 Index and EuroStoxx 50 Index. For a full list of markets available in version 6.3 and complete description of functionality, please go towww.marketforecasting.com.
Matt Blackman is a technical trader, author, reviewer, keynote speaker and regular contributor to several industry publications. He is an affiliate member of the Market Technicians' Association and Canadian Society of Technical Analysts.