Collective2

This IWM (Russell 2000) signal should result in trades with an average duration of 5 days for Longs, and 2.5 days for Shorts, i.e., with an average of 6 trades per month. Our objective, unsurprisingly, is to achieve exceptional gains, with moderate drawdowns, and low trading commission costs. Our strategy will be to use UWM and TWM (the 2x ETF versions of IWM) instead of IWM itself, and to avoid margin costs by using only the cash available. Margin will only be used sparingly, and normally only to help achieve round lots.

When there is a divergence between our IWM signal and our DIA, SPY, or XLF signals, then the IWM holding will be cut in half and one of those other equities will be Shorted (if IWM is a BUY) or bought (if IWM is a Short). This should result in an approximately market-neutral situation during choppy (and therefore less predictable) market phases.

This actual performance of this IWM signal has been independently tracked by TimerTrac since 9/4/08, and has resulted in large confirmed gains over that period. If this signal had been used to trade QQQQ, then the gains would have been even greater. Our IWM signal has evolved over this period, however, and the most recent trade history suggests that future actual performance should be even better. Actual performance data since 9/4/08 can be viewed at http://www.schulenberg.com, and additional details about our modeling approach are available there as well.

Based upon 9 years of back-testing results, this signal should be Long (UWM) about 66% of the time, Short (TWM) for about 31% of the time, and in Cash for the remaining 3% of the time. No Stops are used, and it is assumed that all trades are made at the market Open, and using Market Orders. This is a high-performance trading system that is extremely simple to implement; manual trading is quite feasible, saving the fees that would be needed for GEN3 autotrading.

Our back-testing analysis shows that trade accuracies can 'theoretically' be as high as 84%, and that maximum drawdown could be as low as 5.7%. Using the 2x ETFs (UWM, TWM), of course, will double potential gains (as well as doubling the drawdown).

Our market timing algorithms are based upon the calculation of an effective temperature for the stock market. This basic MTI (Market Timing/Temperature Indicator) is obtained by modeling the stock market as though it were a gas -- except that special kinds of stock portfolios (with rather exotic buy/sell rules) are used instead of partitioning gas molecules into groups possessing the same momentum. The calculation of the MTI is thus analogous to determining the temperature of a gas by using the Maxwell-Boltzmann equation. Final models utilize the MTI, but also a wide variety of technical indicators, neural networks, and a proprietary generalization of Japanese Candlesticks. This latter method is fully numeric, and not graphical. It does, however automatically find all candlestick patterns that have reliable predictive power.

One thing is certain: the signals generated by this model will be unique. To the best of our knowledge there are no other algorithms like these in existence -- and the predictive capabilities provide a distinct advantage. But, of course, time will tell...