Dr. Hans Uhlig’s Nearest Neighbor Prediction (NNP) trading system works by finding near neighbors of the reference pattern, and then averaging the next moves of the neighbors to get an estimate of the next move of the reference pattern. In his Refinements paragraph, he outlines a method of improving the performance wherein each neighbor is weighted in proportion to its distance. A further refinement he describes would be to apply different weights to individual elements of the pattern.
NNP using Adaptive Net Indicators in the NeuroShell Trader:
The NeuroShell Trader has an available extra-cost add-on called Adaptive Net Indicators (ANI) which was designed exactly to do the near neighbor prediction as described above, including both refinements. This will save you from doing the spreadsheet manipulations that Dr. Uhlig calls “laborious and time-intensive”. The ANI add-on will not only make a prediction of a coming move, but is also capable of classifying patterns as well (e.g. buy or don’t buy, sell or don’t sell).
Adaptive Net Indicators will work with any type of pattern information, not just previous price values. You can choose almost anything for your patterns, including stochastics, moving averages, or any of hundreds of other indicators. You can choose your own “lookback” period (the amount of history to include), or allow the genetic algorithm optimizer in our Professional versions to find the lookback period that makes the most profit at the same time it finds the best indicators and indicator parameters.
The ANI add-on also allows the user control over the distance proportional weighting. As Dr. Uhlig described, the weighting should be higher for close neighbors and less for distant neighbors. The ANI not only do this automatically, but also let you specify how quickly the weighting drops off for distant neighbors.
Each item of your pattern can in fact have a different rate at which weighting drops off as distance increases, which in effect specifies the “importance” of each element in your pattern, whether the item be a past price as in Dr. Uhlig’s article, or an indicator. Alternatively, you can let our genetic algorithm optimizer find these importance factors so that you will have an idea of which elements of the pattern are most effective for prediction and making a profit.
How to insert an adaptive net indicator:
To insert the indicator:
1. Select Insert – New Indicator
2. Select the category called “Adaptive Net Indicators”
3. Select one or more of the several ANI available based upon how many pattern elements you desire to use.
Other NPP possibilities:
The NeuroShell Trader Professional and DayTrader Professional have other add-ons that do processing very similar to NPP. The Cluster Indicators find clusters of near neighbors which precede a buy or sell opportunity. The Fuzzy Pattern Recognizer shows you whether a pattern is a near neighbor of one that you are allowed to specify yourself.
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