I hope you are well and are continuing to enjoy the wild ride we’re still on. Stock markets continue to go nowhere fast, taking one step forward and one step back.
The advantage of short term trading is that you’re not shackled to a traditional buy and hold strategy. This means that, depending on your method, even when markets are stuck in a range, you can still make money.
Interest in trading the financial markets has never been higher and I suppose one positive to come out of the recent crisis is that it has encouraged many people to take a more active role in their finances. At the very least, it has encouraged people to understand previously alien terms such as libor and interest rates. On the other end of the scale, I’ve seen a big increase in the number of people interested in getting into trading and wanting to purchase a trading system. It is commendable that people want to take more control over their financial decisions, but if you are looking to purchase a system, the old adage holds true – Caveat Emptor (Buyer beware).
There are some great trading systems out there and I’ve covered many profitable angles in the monthly What Really Profits newsletter. However, not all trading systems are fit for purpose. Some systems might work well, but might only really be useful to an experienced operator. There are no holy grails in trading. There are some excellent systems which provide you with a genuine edge, but you still need a money management plan and back up support to really get to the most out of something. The best trading systems will include elements of this in the purchase price.
Vantage Point – can you lose money with this 80% accurate trading system?
One popular trading system that I’ve been researching over the last couple of weeks is Vantage Point from www.Tradertech.com.
Vantage Point is one of those systems that has been around for a long while and is continually advertising in the most popular trading magazines. The big claim made by Vantage Pont is that it is 80% accurate. I’ve recently received a lot of feedback from members who have used Trader Tech, none of which is positive. However if you go to the Tradertech website there are a number of positive reviews from respectable publications, all of which are positive. There seems to be a real disconnect somewhere.
Let’s have a look at the details of the system and how they can make this claim.
Vantage Point’s big ticket is its intermarket analysis using neural network technology. Intermarket analysis is an interesting area of study that involves comparing various external markets to see how they effect the market you are looking at. For example if you were looking at the GBP/ USD exchange rate you might see how the price of oil, gold and interest rates affect it. Neural networks are a computer model that aims to self learn the right out come through repeated testing. Neural networks are ‘taught’ to spot patterns in data, which it then learns to make predictions.
Vantage point then uses this intermarket analysis to provide you with a number of indicators. The main one is a the neural index which predicts whether the 3 day moving average will be greater or less than the current level in 2 days. There are then various other indicators based around this such as the strength of the indicator. The 80% accuracy claim is related to how often the 3 day moving average does indeed move in the direction predicted. This claim does seem to be correction, however, it is not an indication of how profitable the system might be in real trading terms.
To be fair to Vantage Point, they do state in many places that their system should be used as a tool to help confirm your own decision-making. Additional analysis is required.
There are a number of positive reviews on the Trader Tech website, mostly from reputable independent publications. Many of these confirm Vantage Point’s headline claim of 80% accuracy as being correct. So how can we reconcile the fact that I’ve had so many poor reports on Vantage Point? Many of these reports state that Vantage Points predicted levels are often way off.
One reason might be the high selling price with no guarantee (£2,500+) just for one market. If you want to trade forex and stock markets you have to pay another grand. I’ve had reports of pressure selling from the Vantage Point marketers and in my experience high price systems + pressure selling + no guarantee runs a high risk of many annoyed customers, no matter how good the system turns out to be.
Although they do point out that Vantage Point is just an indicator (not a complete trading package) in their literature, this doesn’t always seem to be the case with the personal sales email and phone calls I’ve had feedback on. It may be that Vantage point does work but either a) purchasers go into it with unrealistic expectations about how much Vantage Point could do alone or b) the personal sales emails and phone calls didn’t discourage these unrealistic expectations.
I think the real reason for the disconnect between the positive industry reviews may be down to those pesky neural networks.
The problem with neural networks
In the real world, neural networks have been used for many things such as the military teaching a drone plane what might be an enemy combatant and what might be a tree. Neural nets have been around for some time, but it must be said that they have had limited success on the financial markets. The problem is that in some ways, neural nets are the ultimate curve-fitting machine. I’ve mentioned in the past the dangers of curve fitting being that you create systems which work in theory because they are based on what happened in the past, not a logical idea you have. There is a difference between creating a system that works then back testing it to ensure it is robust and creating a system which is entirely based on past data with no logical model behind it.
An example of where neural nets can go wrong is when recently the military were testing a neural network’s ability to spot the difference between an enemy tank and a friendly one. They did this by getting it to scan photos of enemy tanks and friendly ones. It learned this quite well, yet when it came to live testing it got it completely wrong. The reason was that most of the pictures of the enemy tanks had worse lighting or were taken in the shade. The NN had thought it had spotted a pattern that shade = enemy tank. You can see how easy it might be for a NN to pick up the wrong patterns in the stock market.
Most of the industry reviews of Vantage Point use back testing only. To my knowledge, none show live results. The problem is that Vantage Point is continually updating itself with more neural network updates based on recent data (which you have to pay for). The danger is that each update simply performs a new curve fitting test that makes the neural network even more accurate in relation to the past but with no tangible evidence of its forward predictive ability.
I’ve great respect for traders’ magazine but their review compares the 7.0 version against the 6.4 version. In both cases it is confirmed that the NN is 80% accurate over the same time frame. However, in both cases, just 500 days data was used with just 80 trades made. That really isn’t a huge amount of time in trading terms and leaves some scope for the market to behave differently outside of these time frames. The neural net may indeed pick up some decent patterns, but what if we hit a patch where we have done now where markets behalf very differently to how they have done in the recent past.
I would like to see a study of how older version of Vantage Point perform in the current market. For example would a version of Vantage Point from 4 years ago still be able to cope with the current market. More recent versions might be ‘optimised’ to take into account recent events, but if the model is to have any real merit, the previous versions from a few years ago should still be reasonably accurate today.
In conclusion, Vantage Point may indeed have merit, but if it does, it is as an indicator alone, not as a complete trading package. However, there is a danger that it may work in back testing only.
Unfortunately I have been unable to test Vantage Point because TraderTech wouldn’t let me test it out. So without a moneyback guarantee, that’s as far as I can take it for the moment. Costing at least £2,500 and with no money back guarantee there are many other offerings I would recommend over this one particularly for newbie traders.
Choppy stuff on the forex markets and my swing trades have just about been break even over the last week or so. INO’s Market Club has continued to be on the right side of most of the big moves and I’ve been following that with interest. I went short the S&P500 yesterday using some of my own analysis and blending in the excellent research from SentimenTrader and Quantifiable Edges. There doesn’t seem to be too much of an edge either way at the moment so I’m taking profits quickly. The trouble is that everyone seems to be of the same opinion so moves aren’t lasting a long time.
This week’s trading buttons
We’ve a series of speeches from ECB president Trichet side other central bankers throughout the week. The ECB’s 50bp cut was largely expected last week, but there were some bold last minute predictions of a 100bp cut. Investors will be listening carefully for any hints from Trichet on future decisions. Friday promises to be the week’s busiest day with US retail sales and Fed chairman Ben Bernanke speaking at the 5th ECB central banking conference.
“I try to make money infrequently, as infrequently as possible simply because I believe that rare events are not fairly valued, and that the rarer the event, the more undervalued it will be in price.” Nassim Taleb.