The Forecasting Systems Letter
Jeffrey Mishlove

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Yesterday, in commenting upon the reversal of the BioComp Profit neural network "mega-system" signal from Down on Wednesday to Up on Thursday, I made the following point:

"With such a signal, it would be typical to see the market on Wednesday down in the morning and then rebounding at the end of the day."

If I were announcing this ostensible confirmation simply to call attention to my prognostication skills, it would be both self-aggrandizing and dishonest.  After all, as the posted track record indicates, the pride of my neural network collection, my "mega-system," has been performing dismally since I began posting the results.  And, even today the system lost money.

My point is simply this:  BioComp Profit offers a mechanical trading system, based on placing all trades at the close.  But, when yesterday's signal suggested that the market would go up between today's close and tomorrow's close (after going down today, from yesterday's close) -- there was a good chance that the upward movement would start sooner.  I have not measured this precisely, but it seems that I have observed it over and over again.  Based on this assumption, it would be reasonable to have closed the short position and opened a long position sometime in the middle of the day.  Although BioComp Profit is not, itself, capable of determining when this should occur -- other systems can help.

The following chart, for example, is from MetaStock with KWIK*POP, 3-minute indicator.  It seems to provide some suggestions when to reverse:

There is a problem, of course, in combining a mechanical trading system with one that allows for intuition and discretion.  A very nervous trader, might have abandoned the short trade at about 7 am (PDT).  Had that occurred, not only would there have been no profit -- but the potential for a loss, as the market then turned down.  Because of this sort of volatility early in the day, KWIK*POP founder Wayne Harrison suggests that traders wait until after 7am (Pacific Time) before working with his system.

Assuming that one maintained the short position as the market turned down again, after 7 am, the next possible reversal point in the chart above occurs some time after 8 am.  In this situation, however, the candlesticks did not turn blue -- only yellow.  Even if one had closed the short position at that time, this KWIK*POP indicator was not yet strong enough to go long.  In fact, one might have resumed the short position at about 8:30 am.  It is not until about 9:30 am, that a blue candlestick appears.  This, combined with the other momentum indicators on the chart above, suggests a good time to go long at about 876.

KWIK*POP is normally designed to find many small trades to make throughout the day.  BioComp Profit is designed to trade no more than once each day -- at the close.  The combination that I am proposing here allows some room for flexibility.  But, in general, I would propose simply using KWIK*POP, or a similar system, to place one trade some time in the middle of those days when the Profit signals suggest a reversal.

Fooled By Randomness: The Hidden Role of Chance in the Markets and In Life by Nassim Nicholas Taleb.  New York: Texere, 2001.
 
 

This is a beautifully written, sensitive book by a brilliant and highly educated author.  I highly recommend it.  My only complaint is that I happen to disagree with the book's central premise.  In my estimation, this is not very much a book about randomness and chance.  I think a better title would have been Fooled by Arrogance: The Hidden Role of Hubris in the Markets and in Life. 

Nassim Nicholar Taleb has written a book is full of fascinating tales of traders who achieved stellar success only to later "blow up."  They became convinced that their success was due to their own thoughtful insights about the market.  So, when the market changed (as it inevitably does), they failed to change with it.  As a consequence, their unstoppable systems broke down and ended up losing – for themselves and/or their employers – even more money than had originally been gained.  Naturally, the greater losses occurred because greater risks were being taken with systems that had proven themselves so well for a few years.

Somehow, however, this does not strike me as a problem associated with randomness.  Taleb suggests that, perhaps, it was just dumb luck that enabled certain otherwise unremarkable traders to chance upon a system that produced sustained profits for more than a year.  But, I don't think so.  I would be more inclined to think that it was a shrewd insight and good market acumen.  Systems that work well over a period of many months and even years do so because they are well-matched to market conditions at that time.  Nor, in my view, is it a random coincidence that such systems stop working eventually.  As market conditions change, this is almost inevitable.  The traders described by Nassim Nicholas Taleb who "blew up" (whose multi-million dollar earnings turned into even larger losses) were fooled not by the randomness of the markets – but by their own psychological rigidities and presumptions.  They simply failed to account for the fact that their systems could not continue to hold up over time, while market conditions themselves changed.

The question of randomness, in the markets and in life, is a deep issue – with many ramifications for science, and certainly for the art of financial forecasting.  As a parapsychologist, who is also engaged in financial forecasting, I notice that I observe patterns in data that others, more skeptical (such as Nassim Nicholas Taleb), probably would think to be random.  The great Swiss psychiatrist, Carl G. Jung, coined the term "synchronicity" to refer to forms of meaningful connection that so transcend science as to be thought of as "acausal."

Ironically, I had such an experience myself while I was reading Fooled by Randomness.  Perhaps, it was that very experience that shaped my opinion of the book.  I was staying at a hotel in Glendale, California, on July 14, 2002.  In the morning, while dressing, I had the television on and happened to watch a cartoon program. (This is quite uncharacteristic for me – as I normally keep the television tuned into the news.)  The cartoon was part of a series called Sherlock Holmes in the 22nd Century, and the particular episode I saw dealt with a rocket ship called the "Silver Blade" that had been stolen.  Sherlock Holmes solved the mystery.  The thief was a pilot who happened to own a dog.  Holmes observed that the dog had failed to bark during the theft.  This was a story I had never heard before, to my recollection, in my 55 years.

Within minutes of turning off the television set, I picked up Fooled by Randomness, and began reading – on page 140 – a section called "The Dog That Did not Bark: On Biases in Scientific Knowledge."  Here Taleb was complaining about what parapsychologists have come to call the "file drawer problem," i.e., that studies with null results never find their way into print.  To express his point of view, he stated:

There may be great information in the fact that nothing took place.  As Sherlock Holmes noted in the Silver Blade case – the curious thing was that the dog did not bark.

But, what about my synchronicity of learning about the Silver Blade story only minutes before I needed that information to understand Taleb's point?  Was that simply a chance event, as conventional wisdom would have it?  Frankly, since it occurred to me and I was emotionally struck by it, I think not.  But, if it was not random, then what significance does it hold – other than in temporarily assisting me in grasping the meaning of his message concerning basic probability theory?

Carl Jung attempted to address this question of the meaning of such synchronicities, by looking at the deep psychological issues of those experiencing such events.  The ancients often saw omens and portents in events of this sort.  A more refreshing view was expressed by author Michael Talbot, in his book, The Holographic Universe.  He compared such synchronicities to the dust devils that form in the autumn – causing fallen leaves to whirl about in a distinct shape, only to fall apart as soon as it is noticed for more than a few moments.  The dust devils are not really random, although they do have a chaotic quality to them.

While I do not accept my synchronicity as random, I know it would be a terrible mistake for me to assume, in any way, that it signified I was somehow favored by the gods, by fortune, or by my own wit in noticing connections that might escape the attention of others.  That would be falling into the trap of hubris. 

I think of the financial markets in much the same way as I view nature or the depths of human consciousness.  Dust devils and synchronicities do occur; and they are not entirely random events.  In truth, they are packed with meaning.  The key, I think, to grasping that meaning, is to be able to empty oneself of preconceptions and patiently, quietly observe as the situation reveals itself.  Ultimately, the insights that develop can be very personal.

Nassim Nicholas Taleb, to his credit, reveals the same understanding in the paragraph just following the Silver Blade story.  He writes:

 I am frequently asked the question: when is it truly not luck?  To be honest, I am unable to answer it.

BioComp Profit Neural Network S&P 500 Futures Contract "MegaSystem" Forecast:
Thursday's close: Up from Wednesday's close
Friday's close: Up from Thursday's close

Nirvana OmniTrader Composite Technical Forecast for the S&P 500 Futures Contract:
Short-term, aggresssive strategy: Down

NeuroShell Volatility Breakout System, Daily, for S&P Futures Contract: 
Buy Stop Order for Wednesday at 899.00 (not filled -- price was touched, but not penetrated)
No current signal

KWIK*POP Daily Trading Signal (As Confirmed by Hourly Chart)
Buy (902.50, 5 pm PDT, 10/23/02)