S T R A T E G I S T   F O R E C A S T

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QQQQ Day Trading – the Poker Strategy

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The purpose of this document is to explain how our use of the QQQQ day-trading signal shown in Table II of our Prediction Table (PREDTABL.TXT) is similar to the strategy in Poker of varying the bet based on the strength of the hand.

*** IMPORTANT: Keeping the money ‘at risk’ commensurate with the strength of the signal:

Class I QQQQ Day-Trading Signal:

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Our current QQQQ day-trading methodology utilizes Table II of the Prediction Table (PREDTABL), and employs the following rules:

(1) All QQQQ trades will be assumed to take place at the Open price (Buys and Shorts), and at the Close price (Sells and Covers). We will NOT attempt to ‘time’ the entry or exit point.

(2) We will ‘score’ all QQQQ trades WITHOUT assuming stops of any kind, and we will utilize our standard weighting factors (0.50 for ?+ and ?-, 1.00 for * and S, 1.25 for ** and SS, 1.50 for *** and SSS, and 2.00 for **** and SSSS).

(3) As is required by Table II, the QQQQ signal (and weighting factor) will be determined by using the exact Open price.

We have only one day-trading signal within our Strategist System at the present time, and that is the signal for QQQQ. The basis for this signal is Table II of our daily Prediction Table (PREDTABL). This table gives the following 10 signals that are based on the OPEN price of QQQQ on a given trading day: ?+, *, **, ***, ****, ?-, S, SS, SSS and SSSS. The ‘?+’ and ‘?-‘ signals mean that Table II is predicting a very flat price variation for the next day, and one that consequently has a greater amount of uncertainty. The ‘*’ is a Long signal, but it is not as accurate as the ‘**’ signal, and definitely not as accurate as the ‘***’ and ‘****’ signals. Similarly, the ‘S’ signal is a ‘shorting’ signal, and the ‘SS’, ‘SSS’ and ‘SSSS’ are increasingly more accurate ‘shorting’ signals.

The historical (back-tested) accuracies are:

The idea behind our ‘Poker Strategy’ for QQQQ trading is to vary the amount of money at risk based upon the signal from Table II (of PREDTABL.TXT). Remember, however, that this strategy requires knowledge of the Open price of QQQQ, so the actual QQQQ signal will not be known until 9:30am EST (when the market opens).

The current parameters for this strategy are still being finalized, and we will always summarize the latest set of parameters in this section of the daily Forecast. We are in the process of developing a simulation which will help us fine-tune the parameters based on actual market data over a long period. In addition, this simulation will determine the optimal ‘stop’ settings to protect against a runaway market in the event of an incorrect prediction.

The idea is to put more money at risk in QQQQ when the probabilities for success ‘seem’ greater. That’s why it’s like Poker –- you bet more when you have a good ‘hand’. The QQQQ signal can then be expressed as:

The multipliers (0.50, 1.00, 1.25, 1.50, 2.00) are subject to change as we refine this method. Again, the Open price of QQQQ must be used in Table II (PREDTABL.TXT) to determine the Signal. Then, either the Maximum Long% Allocation (M), or one of the other six multipliers, is used to determine the Final Signal.

Henceforth our estimate of market trend on the next trading day will be concisely expressed by this new signal – and this information will be supplied in our standard MOS email at the market Open. However, in the event that we are unable to generate this email in a timely fashion, our subscribers should become accustomed to making this calculation for themselves.

In addition to refining the 5 multipliers, it is possible that we will want to apply some additional factors, e.g., a multiplier that varies depending on whether our QQQQ signal (the Grail signal) is currently in the ‘buy’ or a ‘sell’ state. We will be focusing a lot of attention on this ‘Poker Algorithm’ in the weeks to come.

The subsidiary rules, which are still provisional, are as follows:

Rule 1: The exact signal must be determined at the market Open (from Table II and the above parameters), and that is when QQQQ should be bought, sold, shorted, or covered – UNLESS Rule 2 dictates a modification.

Rule 2: If possible, do not close our the current position IF IT IS MAKING MONEY; wait until it starts to falter before switching to an opposing signal. For example, if we have a Short in effect while the new signal is a Buy, and during the next morning QQQQ is falling … keep the Short for a while (to maximize gain) before covering it and going Long.

IMPORTANT DISCLAIMER:

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All investment in the stock market carries risk, and short-term trading tends to have higher inherent risk than does longer-term trading. Since our historical trading accuracy for these day-trading signals is AT BEST 65-70%, several losses in succession can cause significant drawdown. DO NOT attempt to trade this strategy with real money until you have paper-traded it for a while.