The Single Most Urgent Rule for Market Traders

As we enter 2018, the indicators haven’t been showing much activity. If you averaged the readings from all our forecasters, you’d get a number close to zero. Not very exciting. And there would be very little variability. It’s not a question of big swings in one direction canceling out big swings in the other. The indicators are quiescent across the board.

In the case of oil and oil stocks, that might seem disappointing, since our indicators failed to catch  the strengthening in oil prices. But we can live with that. Keep in mind that our indicators are carefully designed to minimize the likelihood of a false positive. Better that they occasionally miss a move than that they erroneously get you into a nonexistent move.

If you come from the world of medicine, or if you’ve ever been a patient awaiting the results of a medical test, that requires a reversal of how you’re accustomed to think about false positives vs. false negatives.

False Positives: Medicine vs. the Market

In the health arena, a false positive is when a test says you have a disease that you don’t actually have. It might lead you to undergo unnecessary treatment, obviously not a great outcome. But it’s a lot better than a false negative, which says you don’t have a disease that you actually do have. A false negative can cause you to not treat a serious condition. In the most extreme cases, it could end up killing you.

Market forecasters can have false negatives and positives as well. But here a false negative is the more benign type of error. It happens when – as recently with our oil indicators – an indicator fails to signal a market move, so you don’t benefit from the move. It can be annoying and frustrating, but your only loss is the opportunity cost. Your money remains intact, on hand for you to deploy into other investments another day.

A false positive in the market wrongly signals that something will happen – a big move in oil stocks, say, or in bonds, or in anything at all. You invest, and it turns out the indicator was all wet. You watch your money shrink and have less on hand for genuine opportunities later on.

No matter how many hours I put into developing and refining my indicators, it’s not just a simple matter of forecasting when to get in and when to stay out. It’s also a matter of incorporating guards against false positives. That’s especially true when you’re compounding your gains and losses, as we do with our three-pot trading system.

Our 13-Fold Gain

As an aside, there likely are some trading systems in which false positives and false negatives have fairly equal import. But, and I’m speculating here, I suspect that would apply primarily to portfolios that are highly diversified. For more concentrated portfolios, avoiding false positives is primary.

The general rule: in any trading system going for huge gains – and that’s us – false positives can be catastrophic, while false negatives are merely frustrating.

Our results speak for themselves. With our latest closeout last week, our two-year record has moved up to a 13-fold gain.

That’s huge, reflecting in part the nature of compounding. I think it’s unlikely we can continue to rack up gains at that particular rate. But we’ll try our best. I’m not asking for commiseration here, but I did spend the bulk of the so-called holiday working to improve my indicators, particularly by incorporating China and various Chinese metrics.

Maybe not so festive – but no regrets. One of my New Year’s resolutions is to continue to spare no effort so that I – and my indicators – will  perform at the highest possible level.

Stock Talk

Martin V

Martin Vetter

A good perspective to share – and congrats on the 13-fold gain!

Fo

Fo

Many thanks for your diligent efforts, Steve.

Scott Chan

Scott Chan

Dear Fo and Martin,

Thank you for your kind words.

Steve works really hard on these indicators (sometimes I don’t think the man sleeps!) and it makes him very happy to see the trades work out and make some money for our readers.

Rick

Rick

Scott,

I have not yet acted on any trade alerts but will be joining the action on the next alert.

Are there any open positions? The portfolio tab is empty and I did not know if that meant no positions or that the portfolio was not used for this service because it is unique.

Scott Chan

Scott Chan

Dear Rick,

Welcome aboard!

We just closed out our last open position before the end of the 2017. Steve’s various indicators right now aren’t flashing buy or sell signals. Rather than forcing a trade, he’s remaining disciplined and awaiting for the indicators to tell him when to make a move.

Based on my experience working with Steve and his indicators, there should be new opportunities within the next week or two. The indicator signals are always moving. What we don’t want to do is become impatient and do a trade that we shouldn’t.

Rick

Rick

Thanks for the quick reply. I’ll look forward to the next alert.

Gary Vogt

Gary Vogt

Please explain how the 13 fold gain 0ver the last two years was calculated.

Scott Chan

Scott Chan

Dear Gary,

Steve talks about the 3 pot system at article I link to below:
https://www.investingdaily.com/aggressive-trader/articles/40297/the-three-pots-system-for-maximizing-your-gains

At the bottom of it is a spreadsheet that shows the calculation, which starts with a hypothetical investment amount of $3,000, split into $1,000 in each pot. The three pots are kept separate and the trade returns are compounded. Note that Steve only counts the indicator driven trades. He has excluded the stock option trades, which the indicators don’t predict.

This spreadsheet was uploaded a few weeks ago and doesn’t include the latest closeout, which is the 59% return on the GDX call. The trade was a Pot 1 trade, and when the gain is compounded into Pot 1, Pot 1’s return grows to $38,867.58. When you add that to the Pot 2 and Pot 3 compounded returns, the total value of the 3 pots is $41,116.13. That’s a 13.7 time increase over the original starting amount of $3,000.

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