The winning performance achieved in trading the USD/JPY pair using only VantagePoint’s predicted neural index (PIndex) as an entry signal, as described previously in Parts 1 and 2, continued over the past month, as shown in the figure below.

Part 3 of the testing started after the trade closed in Part 2 on April 20, and six new trades were signaled, four of which were profitable. Three of the four winners reached the 100-pip profit target. This brings the totals thus far for the year 2009 to 29 trades signaled, with 24 winning trades, which is a win rate of more than 82%. Additionally, 20 of the 24 winners reached the 100-pip profit target.

In the figure below, winning trades are marked in green and losing trades in red; “winners” and “losers” were determined using the trading rules presented in Parts 1 and 2 of this series. Note that there is an additional trade signaled at the close on May 18 (far right hand side of the chart), that is still open and, thus, not counted here.

Additional Insights from Additional Indicators

These results are extremely encouraging and useful, of course – a consistent 80+% win rate, leveraged in a relatively simple and easy-to-implement trading strategy, is an extremely valuable commodity! Continuing from Part 2, predicted strength (PStr), predicted short-term difference (PTSDiff), predicted high (PHigh), and predicted low (PLow) can be used to provide further insight into trade entry and exit decisions. Because VantagePoint uses multiple independent neural networks to generate the predictive values it displays, correspondence or disagreement between predictions can be very powerful indications of future price action.

Trade Entries

Due to the relative periods of the moving averages used to construct PStr and PTSDiff, “good” or “strong” trade entries usually occur when PStr leads PTSDiff in the direction of the trade, as the chart below shows. In other words, if a long entry is being signaled, we expect to see PStr moving in a positive direction and above PTSDiff, which we would also like to see moving in a positive direction.

As additional confirmation, we want to see the predicted high and low prices, PHigh and PLow, also moving up for a long entry or down for a short entry. Divergence between price action and the movement of PStr and PTSDiff can also be used as a warning sign to possibly stand aside, as its presence indicates relative weakness in the price action.

Recall that if PStr is above zero, PIndex will be “1”, and if PStr is below zero, PIndex will be “0”. Thus, when PIndex changes value from 0 to 1, PStr will have moved from being a negative value to being a positive value. An aggressive use of the indicators would be to enter trades based on desirable movement in all of the indicators, in advance of PIndex actually changing value.

Trade Exits

When a trade is underway and PStr crosses PTSDiff – that is, PStr is no longer “leading” PTSDiff – this is an early warning sign that the strength of the move is declining. If PStr not only crosses PTSDiff but is also actually moving in the direction opposite the trade, this is a strong warning sign of possible stalling or reversal in price action and an indication that exiting would be a wise choice.

Trade Reentries

Sometimes a trend will stall or pull back for a short period of time and then resume. We can use these indicators to determine the strength or safety of the resumed price action, using the same rules applied for trade entries.

Putting it All Together

Remembering that entering trades based on PIndex alone has a very good track record, I am interested only in enhancing trading decisions and not in complicating trading analysis. So, when PIndex signals an entry, I can use the Trade Entry “rules” described above to provide additional insight to confirm the signal. I can stay in a trade (or a portion of a position) until these rules signal an exit. Possible reentries can be evaluated as described above as well.

Example

In the figure below, PStr and PIndex are shown in maroon, PTSDiff is shown in orange, and PHigh and PLow are shown in grey. Entries, exits, and warning signs are labeled in the chart using the following key:

1 – Normal trade entry. All the indicators agree, PStr leading PTSDiff.
2 – Normal trade exit. PStr has crossed PTSDiff and is moving in a direction opposite the trade.
3 – Warning sign. PStr has crossed PTSDiff but is still moving with the trade.
4 – Early (aggressive) trade entry. All of the indicators agree, in advance of PIndex.
5 – No reentry. PStr is not leading PTSDiff.
6 – No entry. PStr is not leading PTSDiff.

 This article has shown just one combination of VantagePoint indicators that can be used to trade the USD/JPY pair successfully – certainly many others are possible. I hope it has been helpful to you.

By studying the historical price action and the corresponding behavior of VantagePoint indicators for any market of interest, a trader can formulate and backtest possible trading strategies that fit the trader’s risk tolerance, timelines, profit objectives, etc. As we have seen with this forex pair, trade entries signaled by changes in the PIndex are a very reliable baseline from which to start.