May 2000 Newsletter

I. Neural Indicators; New Addon for the NeuroShell Trader Pro

Warning: Neural Indicators are highly technical from a neural network standpoint, and although they can be used by novices, they can only be understood internally by those how have a background in how neural networks function.

Neural Indicators (NI) are several types of neural networks packaged as technical indicators. They will probably appeal to those who like to experiment with neural nets, because there are several types of them, all with different features. They are based somewhat on the “backpropagation” nets that we feature in our NeuroShell 2 classic network package, but there are two major differences. First, they are not trained with the old backprop algorithm. Second, they are not trained to predict anything, only to produce accurate buy and sell signals. Here are the salient features:

1. Signals. NI provide signals from -1 to 1. The general interpretation of these signals will be some sort of “binary” classification, like “buy” (>0) or “don’t buy” (< or = 0). Usually, we simply insert them in a trading strategy as a rule (condition) to buy and sell. 2. Probabilities. NI give probabilities of the signals they produce, because if they are providing a sell signal, for example, the closer to 1 the signal is, the stronger the probability of sell. The closer to -1, the stronger the probability of "don't' sell". 3. Unsupervised. NI are "unsupervised" neural networks, meaning that they do not need to be trained by showing them the correct answers, like most neural networks (i.e., "supervised" neural networks). You do not teach them by providing any kind of actual output which they learn to reproduce, as with most neural nets. 4. Evolutionary. NI "learn" how to give their signals based upon evolutionary pressure. The genetic algorithm (GA) in the NeuroShell Trader Professional or NeuroShell DayTrader Professional "evolves" NI that give better and better signals. Survival of the fittest controls the evolutionary process as usual, where fitness is determined by how much money the NI make, or how good they work as inputs to other nets or indicators. 5. Architectures. Although anyone can use NI, neural network aficionados will love them because there are several highly technical neural network "architectures" included from which you can choose. The following technical outlines are for neural network experts, and you don't have to understand these technical descriptions to actually use the product: a. Ward Nets. This architecture has two different "activation functions" in the hidden neurons. These are called "Ward Nets" since Ward Systems group invented them many years ago (they first appeared in our classic product NeuroShell 2). The genetic algorithm will find out how to pick the activation functions for you. b. Jump Connections. This architecture has connections directly from inputs to outputs as well as the usual hidden neuron connections. This architecture also features connections from one hidden neuron to the next, like Turboprop 2 has. c. Recurrent nets. This architecture analyzes not only the current bar of information to produce its signal, but it also reviews a condensed summary of the most recent bars as well. More recent bars receive more weighting than older ones. d. Sparse nets. These are nets which are not fully connected between the input and hidden neural layers. This means that more inputs can be fed to them without increasing the number of weights drastically. The fact that less information can be stored in sparse weighting connections is compensated for by the fact that less weights allow better optimization. e. Conditional Versions. We have implemented modified versions of all of the above nets. The conditional version of each of these architectures produces a value of either true or false rather than a value between -1 and 1. Therefore the conditional version of any of the architectures can be used in a Trading Strategy without the necessity of inserting it into an A>B indicator.

6. Generalization. These nets generalize very well, meaning they do not have a strong tendency to “overfit” or “curvefit” like backpropagation neural nets do.

The entire package of Neural Indicators is $249. Neural Indicators require the NeuroShell Trader Professional or NeuroShell DayTrader Professional. Read more about them on www.neuroshell.com (addons sidebar), or call or email if you have questions.

II. Informal Investment Club Utilizes NeuroShell Trader Professional and OptionStation Together

Michael Stigall is a long time user of Ward Systems Group products, having used our non-trader version of NeuroShell for years in his scientific technical positions. Here in his own words is Michael’s option trading methodology:

“I use Omega Research’s OptionStation to follow four technical stocks and all of their associated stock options. I run the entire system once or twice a week, and it takes about four hours to update all of the files and run the associated programs. I’ve written a few custom comparators to ease the weekly perusing, and rank the options on their likelihood to present a large profit (according to OptionStation’s option price modeling). I have some filters in the process to eliminate overpriced options and options which have low liquidity. This will usually result in one or two stocks whose options rank highly based on the statistical/probable likelihood of profit, and a general trend direction. For instance, the top ten option recommendations for a given stock may all be Call options, which implies the stock price will be going up.”

“Next I run NeuroShell Trader Pro on the top-ranked stocks, and obtain a five-day forecast on % change of closing price for the same stocks. NeuroShell Trader provides direction but also timing. I look for a strong trend in the same direction as OptionStation proposed, but I also try to time the purchase to take advantage of any “dips” which may lower prices.”

“Totally off the subject, but related… When one goes on a weight-loss program, they shouldn’t keep the fact to themselves. Tell all of your friends about your new effort. When they see you reaching for a piece of cake after a meal, they’ll kid you (or remind you… or both) about your diet. This keeps you focused and honest. I try to use a similar methodology on my trading. A small cadre of my friends (ten people currently) is informed the previous night via email of my planned trade, and is invited to watch the trade. If I break one of my stated rules for trading or miss one of my goals, they will kindly remind me and keep me honest.”

“These same friends have been a wonderful support group and think-tank, and will sometimes point out obvious tweaks or errors which I miss while huddled in the details. They are welcome to take advantage of the trades in their own accounts, if they so desire. We plan to open a combined trading account later this year, and we are currently researching whether an investment club, partnership, corporation or fund makes more sense for the venture.”

“My friends receive three types of files within the email each week.

1) screen capture of OptionStation’s recommendations.

2) screen capture of NeuroShell’s forecast.

3) an Excel spreadsheet which serves as my “trader’s notebook” for each trade, whether real money was invested, comments on the trade, etc.

Each of these files is archived to a Zip file for the week, and I keep historical records in case I want to track down a new idea or remember what was traded.”

Michael’s trading was paper trading at first, but now he’s started trading for real. Here are his results:

Assumptions:

Start with $5,000 and invest 1/2 of the portfolio in each option trade.

Invoke 30% stop loss on losing trades

Only invest when both systems (Neural network and OptionStation) agree.

Goal is to maintain a 20% return per month on the entire portfolio.

Returns are tracked monthly.

Results:

Total return for paper trades 70%

Total return for actual trades 98.1%

Later, we asked Michael to elaborate on how he uses the NeuroShell Trader Professional:

“I use modified Bollinger Bands for entry and exits, where the upper and lower bands have two parameters: number of days for moving average, and number of standard deviations. At first I optimized these with TradeStation’s optimizer, but it took almost 3 days. Now I use NeuroShell Trader’s genetic algorithm to optimize and tune, and it takes less than an hour and a half.”

You can see Michael’s picture on our web page. Look for this article on the Real Traders sidebar on www.neuroshell.com, and scroll to the bottom.

III. Using the NeuroShell DayTrader Pro for Futures Contracts

Last month we explained how the NeuroShell DayTrader Professional was not just for “Day Traders”. Here is a reason futures traders may want to use the NeuroShell DayTrader Professional, even if they hold positions for days or weeks.

The problem with using daily bars for futures contracts is that there aren’t enough daily bars to develop adequate models before the contract runs out. You need quite a few bars for training nets or optimizing trading strategies. Then you need a bunch more bars for out of sample evaluation testing. By the time you have enough bars, there’s a new contract you should be trading.

In the past, futures traders have had to resort to appending the daily bars of several contracts together to make a long historical data stream in order to have enough bars. These are called “continuous” contracts. To eliminate the price gaps when switching between contracts, various adjustment schemes were invented.

If you can use 1 or 2 minute bars, as you can in the NeuroShell DayTrader Professional, continuous contracts are no longer necessary. After two or three days, you have plenty of 1 minute bars to make neural nets or backtest your trading systems.

IV. NeuroShell Time Series Professional for Business and Science

Business and scientific forecasting is important today, and neural nets have been applied to thousands of such applications. The NeuroShell Predictor and NeuroShell Classifier are great for those applications. But now we have something arguably better for time series data: the NeuroShell Time Series Professional.

The NeuroShell Time Series Professional is also known as the NeuroShell Trader Professional!! Yes, the Trader Professional is perfect for time series problems, even if the time series isn’t market data. The NeuroShell Time Series Professional is the name you can use when you purchase and we’ll put on the invoice. That way you can order it without your boss or corporate buyers wondering why you are buying a Trading product!

The NeuroShell Time Series Professional reads ASCII text files of multiple time series data streams. We’re calling a time series something in which every record (row, record, observation, case, whatever you choose to call it) can have an associated date in sequential order. You can feed nets into nets, apply sophisticated time series indicators, and use the power of genetic algorithms to optimize net inputs, including indicators. Indicators
are mathematical preprocessing functions for time series and include wavelets, Fast Fourier Transforms (FFT), and Principal Component Analysis (PCA). New indicators can be built using existing ones as building blocks, and saved for later use in other problems. You can zoom in and out of charts, and plot multiple time series on the same chart.

The Turboprop 2 nets in the NeuroShell Time Series Professional can take many times the 16,000 “row” limit in the NeuroShell Predictor, as long as your computer has plenty of memory.

If you already have NeuroShell 2, NeuroShell Predictor, or NeuroShell Classifier, you can even call nets built from those products from the NeuroShell Time Series Professional (NeuroShell RunTime Server required for Predictor and Classifier nets).

You can even add to the product, so to speak, by programming your own DLLs in C or Power Basic.

The addons “Neural Indicators” and “Adaptive Net Indicators” can be used too (Neural Indicators can only be used as inputs to the regular Turboprop 2 nets already part of the NeuroShell Time Series Professional).

There’s a hidden benefit too: your company can buy the NeuroShell Time Series Professional for the company problems, and you can use it to trade!!

If you have intraday data we will also sell you the NeuroShell Time Series Intraday, a.k.a the NeuroShell DayTrader Professional. If you’re on a limited budget, you can start with NeuroShell Time Series (a.k.a NeuroShell Trader) and upgrade later for the difference in price.

Call or email to discuss how this product built for trading can help you with problems in business and science.

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