In today's post I would like to revisit an earlier topic that I had begun writing about but consciously chose to put it on the "back burner" so to speak to address a number of requests detailing exactly how I use the m3 Money Management Modeler in my day to day trading. On March 19, 2009 I blogged about "weighting" http://fulcrumshifttrading.com/blog/?p=69&preview=true&preview_id=69&preview_nonce=d0b9149988
and its importance when forecasting. I wrote that, although many traders and investors were familiar with the concept of how weighting applied to indicators or oscillators, most of these same people had no concept of how this technique could also be used to forecast future prices from a probability perspective. By now many readers of my blog know that I am a trader and Excel programmer specializing in trading applications such as the m3. I then created a follow up tool called the F-Shift Forecaster ©. I mentioned that recent data points in trading can be likened to the approach used in professional sports rankings such as golf and tennis. Tournaments that athletes did well in or perhaps even won 3 years ago, are nowhere near as relevant or important when compared to what you did 3 months ago or for that matter even 3 weeks ago.
Current equals relevancy in both sports and in investing.
As Janet Jackson so eloquently says in her 80's hit song, "what have you done for me lately", your mindset should be no different when considering a trade or investment in your portfolio. One very important distinction that needs to be addressed is the difference between data point and return weighting. Allow me to briefly explain. As I mentioned above, a number of oscillators and indicators use weighting in their calculations based some sort of price data point. Closing price, high price, low price are used in a variety of ways within a number of unique indicators. The F-Shift Forecaster ©uses percentage change - not actual price data points. At the end of whatever time frame you choose to trade, be it monthly, weekly, daily or even intraday there is one common theme amongst them all and that is return. Even a 0% change is a return result. If for example, (again assuming a monthly analysis here) 9 months ago, a stock posted a -2% return, do you not think it is possible to repeat that very return again at some point in the future? Or how about a 1.5% positive return? Would it be safe assume that at some point in the future this stock or index will repeat that very return. Of course it is.
Again, allow me to repeat this concept - a stock or any underlying instrument has a very real probability of repeating that "performance" at some time in the future. What about an extreme return? What about the outliers? (for those of you who are not familiar with this word, an outlier is an extreme or not of the norm) Let's assume there is a monthly return of 14.5% (once again regardless of the instrument). As rare as that monthly return may be, there is the possibility of it (return) re- occurring at some point in the future. Now, with the newest addition to the F-Shift Forecaster©, the "weighting" and "bias" component, you now have the ability to compensate for those extreme outliers by using the spinner buttons which will be explained in the accompanying 5 minute web tutorial below. Positive or negative, monthly or intraday, a future probable outcome can now be modeled using actual historical returns all while incorporating a traders own bias, a traders own weighting and then applying a Monte Carlo simulation to model probable future outcome ranges. For options traders - this is a dream tool. The F-Shift Forecaster © now introduces you to a whole new way to approach the markets when trading or building options strategies.
Below is the 1st in a 3-4 part series (I am allowing myself some leeway here as I always appear to be going over on my web tutorials!). In this web tutorial, watch how this application (built in Excel) uses the powerful Monte Carlo or RANDBetween function to forecast where the highest probability of a stock (or any U.I. underlying instrument) will end up. Add to that the customizable features of weighting and bias and you have a tool unlike any commercially available today brought to you by Fulcrum Shift Trading
Click on the link below and enjoy the 5 minute web tutorial.
Fulcrum Shift Trading