Part 1

"Paralysis by analysis"... "Couldn't see the forest for the trees"... "Tunnel vision"...

These are adages we've all heard. Sometimes our trading can suffer from these kinds of shortcomings, getting so wrapped up in watching "the small stuff" on our charts that we totally miss seeing the elephant charging the camp - or the train leaving the station, so to speak!

This article demonstrates how just one of VantagePoint's many indicators can serve as a pretty big signpost, consistently pointing the way ahead - to profits.

Multi-market input

Recognizing the global nature of the world's financial markets and the effect they have on each other, VantagePoint Intermarket Analysis software examines the relationships of 25 related markets on each target market and makes highly accurate trend forecasts based on the effects of these underlying and often obscure relationships. Intuitively, traders realize these relationships exist and affect prices in multiple markets. VantagePoint provides a means to quantify these relationships and capitalize on them in today's globally interconnected markets.

The Predicted Neural Index (PIndex) is a proprietary indicator included in VantagePoint that predicts whether or not a three-day simple moving average of the typical price (average of the day's high, low and closing prices) will be higher or lower two trading days in the future compared to today.

When the predicted simple three-day moving average value is greater than today's actual simple three-day moving average value, the PIndex displayed by the software is "1.00," indicating the market is expected to move higher over the next two days. When the predicted simple three-day moving average value is less than today's actual simple three-day moving average value, the PIndex displayed by the software is "0.00," indicating the market is expected to move lower over the next two days.

Because this indicator deals with moving averages of the "typical price," which is different from moving averages of the "closing price," the moving average may increase while the closing prices may or may not increase. However, there is a significant probability that, if the moving average of the typical prices moves up in the near term, so will the closing prices.

Backtesting PIndex signs

I decided to backtest trading the USD/JPY currency pair thus far in 2009 using PIndex alone - and nothing else - to make trade entry decisions. No consideration of candlestick size/shape/patterns nor support and resistance levels nor moving average crosses nor oscillators nor day of the week nor news announcements - nothing but PIndex by itself.

My assumed stop losses were set below the analysis day's low for a long trade or above the analysis day's high for a short trade. My exit criteria were (a) reaching a profit target 100 pips from the entry or (b) reaching the first profitable daily close of any size or (c) being stopped out - whichever came first. Because PIndex is based on the expected change in the predicted moving average two days in the future, I expected one of these exit criteria to be met within two trading days.

The backtest was conducted using data from December 31, 2008, to March 16, 2009. When PIndex changed value from "0" to "1," I entered a long trade. When PIndex changed value from "1" to "0," I entered a short trade. When one of the exit criteria were met, I exited the trade.

The results of the backtest are shown below. The green vertical bars indicate winning trades; the red vertical bars indicate losing trades. The PIndex values of "1" or "0" are displayed in the red sawtooth-shaped line displayed at the bottom of the chart.

80% accuracy confirmed

Of 17 trades signaled and entered, 14 were profitable, and 12 of the 14 winners reached the 100-pip profit target. Three of the winners reached the 100-pip profit target and then retraced to what would have been a non-profitable daily closing price, but it did not matter as we had already exited with our profit. In every trade, one of the specified exit criteria was met during the entry day. These trade results represent a win rate of more than 82%. That made me smile!

Source: VantagePoint Intermarket Analysis Software

These results demonstrate again the "80% accuracy" statistic that is often cited for VantagePoint software. By going through this exercise, I also reminded myself that - often - "simple is good."

Because VantagePoint considers the activity in 25 related markets to forecast activity in the market of interest, the PIndex value displayed by the software is the result of hundreds, if not thousands, of calculations involving the activity and forecasts for all of the related markets and not just price action in the market of interest. That's unique and significant . . . and it is also undoubtedly a large part of the reason for results like we've seen here.

In Part 2 of this series I'll describe how other predictive indicators provided by VantagePoint can be used to confirm or dispute the entries signaled by PIndex and also how VantagePoint's predictive indicators can be used to gain even more insight into future price action before and during a trade. For now, maybe you'll want to experiment for yourself to see just how good "simple" can be! Good trading.