I decided to break from my usual discussions of the USD/JPY forex pair and instead use the USD/CAD for examples this time. In this article, I will demonstrate how “easy” VantagePoint makes it to identify high probability “quick-strike” trade entries, in a market other than my usual subject!

The Predicted Neural Index

The VantagePoint Intermarket Analysis software provides numerous predictive indicators a trader can use individually or in combination to make trading decisions. The foundation of these predictive indicators is the Predicted Neural Index, or “PIndex.” Each day, this indicator displays a value of “1” or “0” to indicate expected short-term market direction.

The PIndex value compares the value of two, 3-day, simple moving averages – the 3SMA of typical prices on the current day (or day of interest), and the predicted 3SMA of typical prices two trading days in the future. VantagePoint uses neural networks to develop this prediction, and it develops its forecast based on the action of the market and the influence of 25 related markets, otherwise known as intermarket analysis.

If the predicted 3SMA value is greater than the current 3SMA value, VantagePoint displays a PIndex value of “1.” If the predicted 3SMA value is less than the current 3SMA value, the PIndex displays a value of “0.” Independent studies have shown the PIndex to have up to an 86% accuracy rate. It is important to note that this accuracy calculation is based on an evaluation of PIndex every trading day, not just on the days the PIndex changes value.

Leveraging the Accuracy

The “typical price” used in the PIndex prediction is the average of the high, low, and closing prices for a given day, and the PIndex prediction indicates expected movement of the 3-day simple moving average of these typical prices. So, the logical question is: can all this translate to successfully predicting closing-price movement, and, thereby, help a trader identify profitable trade entry points? As we will soon see, the answer is “YES.”

PIndex Alone Does Pretty Well

I back tested a method using changes in the PIndex value for the USD/CAD pair as a trade entry signal. I list the simple rules used in this analysis below.

When the PIndex changed value, I entered a trade – long, if the new value were “1” and short, if the new value were “0.”

I assumed a stop-loss 20 pips below the low of the analysis day for long trades, and 20 pips above the high of the analysis day for short trades.

I exited a trade when the stop-loss activated, the trade hit a profit target of 100 pips, or the trade had profit at the closing price of the day.

I also exited a trade if PIndex changed value. In this case, I “stopped and reversed,” to be trading in the direction of the latest VantagePoint prediction.

In the chart below, the PIndex is shown in maroon in the lower portion, and I have circled trade entries based upon it. Green circles indicate a winning trade, and red circles indicate a losing trade.

Enlarge Image

This chart shows only a 2-month period during the year (9 wins 2 losses), but the overall performance achieved with this approach to trading the USD/CAD pair thus far in 2010 (thru May 4th) is a total of 15 wins and 6 losses, for a win rate of 71%. Not a perfect track record by any means, but nothing to ignore either. Keep in mind, I obtained these results by following changes in only one VantagePoint indicator (PIndex) – It just doesn’t get much easier than that.

The real beauty here is that VantagePoint does the hard computational work “behind the scenes.” The neural networks analyze the complex intermarket relationships, displaying the results in a simple “1” or “0” format. In this particular testing, utilizing only the PIndex, I produced a win rate of 71%. More importantly, the PIndex accuracy rate coupled with proper money management can go a long way towards handsomely rewarding trading time with net profits.

This isn’t the end of the story however. Stay tuned, because in my next article, I’ll add an indicator to the mix that can boost the win rate up to nearly 90%. Until then,

Good Trading All!