January 2006 Newsletter

In this issue:

I. Announcing the new Pattern Matcher add-on

II. Buy two, get one free

III. MarketTilt – our new signal service

IV. Professor turned trader is the envy of us all

V. Update on a poor dirt farmer from Minnesota – Bud Johnson in his own words

VI. One way to stop this newsletter

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I. Announcing the new Pattern Matcher add-on

The Pattern Matching add-on grew out of many requests by users who wanted to know if patterns in their data streams had occurred before in history, and if so, what type of activity followed after those historical patterns. Some users also wanted to identify a pattern in history and be alerted when a similar pattern occurs in the future. The Pattern Matching add-on meets both needs by providing indicators that match patterns and revealing the subsequent activity.

Pattern Matcher indicators work on any data stream in the NeuroShell Trader, Trader Professional, or DayTrader Professional. The Pattern Matcher can find patterns in raw price data streams or indicators made from raw data streams.

The Pattern Matcher is unlike any of our other add-ons in that it is not designed for use in either a neural network or a trading strategy to make buy/sell decisions. It is intended that the user treat the Pattern Matcher as an intellectual tool to provide input to one’s own biological neural networks for discretionary trading, or as confirmation of other signals you may be obtaining in other ways.

So what does this mean? It means that the Pattern Matcher is designed to provide answers to the questions that have plagued technical analysts since long before computers were born:

1. Has the current pattern that we see in the most recent bars occurred in the past?

2. If so how many times, and how closely do those past patterns match the current one?

3. If there were a number of closely matching patterns in the past, what type of market moves did they precede on average?

You will be making your own subjective decisions about whether or how to trade based on the information the Pattern Matcher is showing you. These subjective judgments will be based on your own study and experience watching similar patterns, and based upon your decisions about what data streams in which to watch for patterns. Price streams (like open, high, low, close, and volume) may not be the proper data streams to be monitoring for patterns. Indicator data streams, in our experience, seem to provide a more reproducible pattern source.

For a few more details visit our site:

http://www.neuroshell.com/addons.asp?pm

Like most of our add-ons, the list price is only $299, and it is sent only by Internet download.

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II. Buy two, get one free

>From now until January 12, if you purchase two NeuroShell Trader add-ons (only those developed and sold by Ward Systems Group apply), you can choose a third add-on for FREE (sorry, the more expensive Cybernetic Analysis add-on can’t be the free one). This sale even includes our latest add-on, the Pattern Matcher. If you were thinking you wanted to purchase some of our add-ons for an extra boost in 2006, now is the time. That translates to a 33% discount!!!

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III. MarketTilt – our new signal service

We have decided to sell signals for one of the models we built here. This will be a monthly subscription service targeted at first just to Ward Systems customers (that includes our business and science user too, because you can trade the signals without NeuroShell Trader)!. Each evening we will put up a signal (long or short) on a website giving the direction the model thinks US stocks are headed.

Many of you already have successful models; some do not. We think our signals may be of interest to both groups. If you already have one or more good models, our signal may act as a confirming signal. If you are still working on your system, you can trade with our model until yours can take over.

The model is a neural network built with SPY data, but is has a surprising track record out of sample during 2005 when applied to other ETFs and DOW stocks. It may not be effective for NASDAQ stocks and small caps, however. You can download a chart and signal data for 2005 before you subscribe so you can apply the signals to your own universe.

If you think you might be interested in such a signal, visit www.wardsystems.org

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IV. Professor turned trader is the envy of us all

NeuroShell Trader user Bob Swihart, his wife Sue and their family spent the Christmas holidays on a beach in Florida. Every day at 3 pm they downloaded market data using a cell phone linked to a laptop, ran their models, and called in their trades. Swihart said it took about 10 minutes to download the data, “just like rain comes down the window.” Just like all those ads you see on TV where people are shown working with their feet propped up on the beach. It was surreal.”

It took him a while to get there. He’s been trading since the late 80’s, mostly watching his pension fund before he retired. The fund allowed him to move money from stocks to bonds and mutual funds. He started out with legal pads, then switched to spreadsheets and created simple indicators such as moving averages and trendlines. When the market tanked in 2000 he decided he had to get serious if he wanted to retire in two to three years. “I wasn’t getting any younger. I looked at many packages and the NeuroShell Trader was the best.”

“I really started to make progress when I got John Ehlers’ Cybernetic Analysis add-on for NeuroShell. I developed a template with all of his indicators and applied them to all of the indexes such as the Dow Jones, S&P 500, the Russell 2000 and 30 year bonds. I had one template with 18 indicators and four other templates with single indicators. It was like panning for gold. It just took time to sift. Some models had very good results, while others were dismal. You have to be motivated to get the best. I had a real incentive because I wanted to retire with enough financial means to live on. I was very happy with what I was able to dig up. It was fantastic – you never knew what you were going to get.” Bob finally wound up using a strategy that goes in the direction that two out of three of his Cybernetic Analysis indicators suggest.

Swihart said he went live with his trades within a few weeks of getting the Cybernetic Analysis add-on. Since October 20, 2004 to early January 2006, his Russell 200 fund is up 283 points and his S&P fund is up 351 points over the same period. Both funds had 11 trades with only two losing trades.

Swihart said the NeuroShell Trader has opened new doors besides just watching his pension fund. He has been retired for three years. He runs every morning, something he’s been doing since age 15. Then he watches the markets and does some research for about an hour every day, something he’s come to enjoy. He looks at a pool of stocks and selects the ones to trade.

“I’m in a second career now and it’s just great. I don’t have to travel to the university, prepare lectures, deal with the politics or deadline pressure. I can work when I want. I wish I had learned to trade years ago, it’s a great career.”

He also thinks it’s a great career for women. “My wife Sue is an artist. She has a T-shirt print shop and does embroidery. She was reluctant to get involved with my trading at first, but she’s been working on it for 2 years. Now she’s better than I am. She really gets excited. Now we’re doing it together.”

The couple has an interest in mountain biking and usually takes a ride every Wednesday, but that doesn’t stop them from trading. They have a small notebook computer that only weighs one and a half pounds that Bob straps to the back of his bike. At 3 p.m. they use their cell phone to get the data they need and plug it into their NeuroShell Trader models, then call in their trades. If they’re biking in an unfamiliar area away from home, they check out the cell phone range the night before so they don’t have to rush back to the hotel to make their calls.

Swihart thinks the type of trading he does with the NeuroShell Trader is great for women who are left with a lot of assets and have to rely on a broker to make trading decisions. “This is a great opportunity for women to manage their money. Women have a lot of talent. They can lay out their trading systems just like I did and get hooked like I did.”

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V. Update on a poor dirt farmer from Minnesota – Bud Johnson in his own words

“I am writing to update what is on your website about me. I thought that I should replace the original post, as it is several years old. But upon reflection, I decided that I would write this update, and write it as honestly as I can. Hopefully my experiences will be of help to some of the newer traders that read this. It is important to be able to deal with both the peaks and the troughs that seem to be inevitable in trading markets, so I will write what I would have liked to have been able to read when I first began trading many years ago.

I made a spreadsheet of my profit & loss by month, and then I charted it. It was no surprise to me that just as the original piece was written about me here on this board, I had hit a peak. Over the next couple of years I did give back a portion of the profits that I had made. It was a combination of a couple of things. One was certainly that I had serious distractions from the trading that I was doing. The distractions were serious enough that I should have exited the market. And the other was what Victor Niederhoffer devoted a chapter to in the second book that he wrote – hubris. All through this time, however, I used the NeuroShell Trader very successfully with long term price and profitability analysis in my business of farming and cattle feeding. But even though successful at long term analysis, my trading suffered due to my being seriously distracted and overconfident.

The difficult thing for most people about trading the markets is that we have to do the “hard thing” rather than what we feel is the right thing to do. One thing that I really do like about the markets is that no committee decides whether I am right or wrong. Keeping score is simple. The report card is the balance in my trading account at the end of the year. There seems to be a very small percentage of people who are born with their brains hard-wired to be good traders. Most of us are born hard-wired with severe limitations when it comes to trading. To complicate matters, it also seems to me that good traders do not generally make good analysts, and the traits that make a person a good analyst usually make for a lousy trader. People who buy the NeuroShell Trader are probably better analysts than traders. This, IMHO, is important, as without a trading system that we develop ourselves, trading for us will most likely be frustrating. This is where software like the Trader can be so very important. Besides being fun to build and test systems, it can save a great deal of frustration and probably thousands of dollars testing ideas in the actual markets. And, without a system, when it quits working, what do you fix? Add to this the tremendous amount of learning that comes with putting in the effort to build a working system with software that allows a person to easily test any idea.

As for suggestions on building a system, I would first make a long term back-adjusted contract of the commodity and visually look for patterns. Does it trend much of the time, or might a swing trading system work? Draw lines from where you would like to buy it to where it might be sold. Ward System’s “Turning Points” add-on is very helpful for this. The points are computer generated, so this takes much of the subjectivity out of the exercise. If this is done with multiple markets, it will be seen, I think, that each market is individual. Another of Ward’s indicators that is helpful here is the Hodrick-Prescott filter. Using either the Turning Points indicator or the HP filter and then hiding the actual price sometimes makes patterns jump out better. The systems that I use came as a result of this and were a surprise to me. I never expected to see stats on out-of-sample data that good.

Using a system that has tested well on out-of-sample data is interesting. A swing system will get a person in long when it is least comfortable, it seems. And then, just as the long position becomes comfortable, the system says to get out of the long position and get short. And on it goes – just as it gets somewhat comfortable to be short, it says to go long. If you think about trading a swing system, this is how it should be. And this is why, for most of us, trading without a system is so frustrating, as we need to be doing exactly what we least want to do. In a trend following system it is similar. It seems like when the time comes to take a position, the market has everyone in a state of mind such that it is impossible to act. This is where having a system built in the Trader is so valuable. It is the “kick-in-the-pants” needed to take a position. The same applies to exiting a trade.

The current systems that I have built in the Trader greatly reduce stress. Entries and exits are clear, and even when I do not follow the signals exactly, I know at those times that what I am doing is contrary to the percentages. Trading is much more enjoyable now than it has ever been for me. Another thing I have done is to take money out of the account regularly, so that I keep a comfortable amount there at any given time. Quality of life is much better, even though I am not maximizing the potential to make money. I trade the markets mostly because I enjoy trading, and I enjoy the analysis and the challenge. In recent years, each year I have about doubled the balance at the beginning of the year. I have no desire to do what is necessary to get rich trading, as the cost is too high for me. But the Trader has been giving me a very nice supplemental income along with a hobby that is fascinating.

I would like to emphasize that this is not an impossible thing to accomplish. If a poor dirt farmer who is very busy Spring and Fall with farming, and who likes to spend much of the summer in the far North fishing, can build and use a working system, it should be an attainable goal for someone willing to put in the necessary time and work. I am sending this unsolicited, as I am a very satisfied long term customer of Ward Systems. Simply put, it is enjoyable working with the Trader. The people at Ward Systems can’t be beat. I am very impressed with how easy the Trader makes it to look at relationships and work with the data in addition to having the neural net capabilities. I have been in the futures markets now for over twenty-five years, and I have looked at a lot of software. Most of it is high priced and of questionable value. Much of it is junk. If I could only keep one market analysis program, it would without doubt be NeuroShell Trader. And for what it is capable of doing, it is a bargain.”

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VI. One way to stop this newsletter from coming

It is really easy. Just change your email address and don’t tell us.

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