January 2005 Newsletter

In this issue:

I. Following in his father’s footsteps

II. When the going gets tough – commentary by Steve Ward, CEO

III. Choosing your training/optimization set in today’s markets

IV. Keep your promises to your valentine

V. One way to stop this newsletter

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I. Following in his father’s footsteps

Dave Gresens is an executive in the automobile auction industry, which he says is a lot like buying and selling in the stock market. However, Dave gets his market inspirations from his father, who made his living as a market investor. Dave’s father gave him some important advice, “Take your hobby and turn it into your profession,” and that is exactly what Dave is well on his way to accomplishing.

Dave watched his father toil with pencil and pad over market fundamental analysis in the days before personal computers, and although he wanted to follow in his father’s footsteps, he is happy he can now do in minutes what it took his father hours to do. Dave believes in both fundamental and technical analysis, but he doesn’t want to spend the hours fundamental analysis still requires, so he applies technical analysis with NeuroShell to stocks that he has already screened “fundamentally” using the Investor’s Business Daily.

Dave started out with some other software, but found that those programs didn’t have the depth he felt he needed. Then he tried NeuroShell, and ironically enough, he rejected that too because he had the preconceived notion that he needed to be a much better trader to take advantage of the tremendous depth and flexibility that NeuroShell offers! After several months, though, he realized that NeuroShell would be a perfect fit for the power he needed to implement his methodologies, so he repurchased it. “It’s a powerful piece of software,” he told us. “I’m sorry it took almost a year to realize it”.

Editor’s note: We’re sorry that people think they need to understand all of the power we offer before they can take advantage of a limited portion of that power, but we’re glad to have Dave back. In fact, when he showed us his charts, we were amazed at how good they were after only a few weeks. Most people take much longer to get that good.

Dave’s methodology is based upon Alex Elder’s Triple Screen methodology, where he looks at the market through multiple time frames, in 3D so to speak. He loads up hourly, 10 minute, and 2 minute charts in NeuroShell DayTrader Professional to see if signals in all three charts are correlating. He starts by observing how the MACD is changing in the hourly chart, and filters the hourly changes through a 10 minute intermediate time frame chart where he compares stochastics to thresholds. Signals passing this screening process are timed in his 2 minute chart to make long/short decisions. He uses tight stop and limit rules to control his entries and exits.

Dave has tried his method on ETFs and indices, but feels that he makes the most money with his fundamentally screened individual stocks. Just during the month of December 2004, his model produced a 184% annualized return (this was not backtesting; in fact Dave doesn’t even optimize this model). His biggest hurdle was learning to trust his model. Like most of us, he sometimes lets his emotions override the model’s judgment, which usually doesn’t end well.

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II. When the going gets tough – commentary by Steve Ward, CEO

1. I first heard the saying “When the going gets tough the tough get going” from the crusty old coach of my high school Junior Varsity football team. The temperature was probably 100 degrees in the hot Texas sun on a dusty field, and I was on the B string getting battered in a scrimmage by the real jocks on the A string. There was no way we were going avoid a trouncing by the A string due to the coach’s natural selection process, which was how the strings were created in the first place, but his words were inspiring and I remember trying much harder.

Sometimes I feel like that coach, and our users are the players, especially our stock trader users. There are maybe 15% on the A string, on the high end of the bell shaped curve doing very well. There are maybe the same number on the other end of the curve, on the D string, not doing so well. One such user calls tech support every few days to convince us that NeuroShell must not “work” because he isn’t successful yet. If he spent half as much time trying new things and reading ward.net as he does calling us, he’d be rich now. Look, the stock markets and forex markets are essentially random or sudden news driven at least half of the time, and if you don’t heed my coach’s words, you are never going to find the sweet spots of predictability. It usually takes many months of hard work, and you’ll never be done because markets change. If it were easy to make money in the markets … well, choose your own ending.

Back to the scrimmage, I was playing way back in the defensive backfield. The huge fullback easily broke through the line and our B string linebackers just bounced off him like he was rubber. Only I was now between him and the goal posts. He came running directly towards me, no doubt thinking, “I can easily just run right over this skinny math geek.” He was like a freight train running as fast as he could at me, but I remembered the coach’s words. Just before he was going to flatten me, I put my head down and hit him head-on right in his thigh pads. The collision knocked me out for probably 30 seconds, but I when gained consciousness the Goliath was limping back to the huddle, and the coach was bending over my prone body yelling in my face “That’s the way to go boy! That’s the way to hit!” I felt like a hero the rest of the scrimmage, but I was really lucky I didn’t break my neck and become a quadriplegic. I had tried hard, but I wasn’t smart. If I had really been smart, I would have had a grip on reality and tried out for the chess team instead!

Some of my players on the D string are trying hard but not facing reality. My favorite piece of wisdom is that statisticians, neural net experts, some engineers, and some newbies like them make the worst traders. That’s because they are always looking for perfection, and always building highly complex models. They won’t trade without exhaustive backtesting over years showing negligible drawdown, good profits, and statistical significance. So they NEVER trade. They are dedicated and persistent, but they’re trying TOO hard. Trading isn’t a science. I’m here to tell you that the best traders have drawdowns, sometimes big ones, and it is rare that anyone exceeds getting 60% – 70% of their trades right on a sustained basis, even with the best resources. If you are one of the players I’m talking about, I say get a grip in the real world and get some rational expectations! Build some smart but simple models, test them a little, and let the long term odds be on your side. Get going, but read article III in this newsletter before you go.

2. The other day I read an opinion piece in the paper which warned that the US stock market is not likely to do as well over time as it did in the years since 1929 and after WWII. The premise was that the steady growth in those days was due to dividends being paid by successful firms, which is quite different today. This prediction, if true, has implications more generic than whether or not the US Social Security system should incorporate stock investments. The implication to me is that any long term investing in stocks is a very risky business. (Of course, I’ve felt that way since the bubble burst.) You had better be ready to make some money during volatile periods. This doesn’t necessarily mean you need to short stocks, but it does mean that to do better than average, you need to be trading, not investing. To my grandfather in his day, that would have sounded like heresy, but it is not his world any longer.

3. I appreciate the voter turnout and all the votes cast for NeuroShell in the Technical Analysis of Stocks and Commodities magazine. When we find out if we have won a third year in the Artificial Intelligence category, we’ll post it on our web site and mention it in the next newsletter.

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III. Choosing your training/optimization set in today’s markets

Builders of financial models please note: It doesn’t matter if you are building neural nets or optimizing other strategies. Early January 2005 is a great time to be doing it with daily bars because it is now easily possible to make balanced data sets to train or optimize on. We’ve had two years of basically a bull market, preceded by two years of a bear market. All you have to do use about 4 years of days and then look for a strategy that makes money on BOTH the bull and bear years. Don’t look for the most profit, look for a smoothly rising equity curve, and consider using the objective function called “Return*EquityCurveCorrelation”. If you want to hold some data out, 2004 isn’t a bad period to take that data from, because it was almost as much sideways as it was up.

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IV. Keep your promises to your valentine

You told her you were going to retire early on your investments. Then the big bubble burst. So you told her, no problem, traders can make money even in a bear market. Then the market turned volatile. You told her it won’t be long before you move her out of the winter cold, rain, and snow to a warm paradise, but you just need a little more time. Then the market turned chaotic as war and scandal after scandal hit the news. It wasn’t your fault! But now when you say these things she’s too polite to tell you what she really thinks: “Yeah, right!”

It’s time to keep your promises to your Valentine before she runs off with one of our customers. It’s time to heed the old adage that you have to spend a little money to make money. It’s time to get the power tools to help you implement, test, and turn your ideas into trading or investment systems. It’s time to get the NeuroShell Trader!

We’re going to help you keep your promises. If you’re willing to get your act together before Valentine’s Day is over, we’re going to give you 15% off all of the NeuroShell Trader Series, including upgrades, and all of our NeuroShell Trader addons! We’re even going to include the NeuroShell Classifier in this sale, because it is great for making long term investments using fundamental data, in case trading isn’t your cup of tea.

Remember, our tools aren’t get rich quick schemes; go somewhere else to lose your money on those. (If it sounds too good to be true, it probably is!) We just sell powerful tools, which include but aren’t limited to artificial intelligence. You’re going to have to put in a lot of work to build winning systems even with these tools, because there’s yet another old adage you need to remember: There’s no free lunch!

This offer ends midnight February 14, 2005. When the going gets tough, the tough get going. Are you tough enough to keep your promises and get going by then?

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