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is compound interest.”
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Methodology
>METHODOLOGY
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The Service Methodology Statement:
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GENERAL STRATEGY: Small Trades ― Big Profits
Successful trading isn’t about finding the next Apple, Inc., or betting it all on some obscure biotech stock or other “Homerun” trade. It’s about developing a systematic approach to identify statistically significant patterns (opportunities) as they
develop in the market – and a mechanism to profit from them.
The more predictable (profitable) the pattern may be, the less frequently (rarely) it appears. For this reason, it is necessary
to scan and observe the broadest markets available to find these patterns in quantities sufficient to consistently supply a
large and ongoing trading portfolio.
Therefore, The Service SYSTEM uses the deepest and most widely held asset classes –
publicly listed companies, and global commodities and currencies – to find the high-probability
trading opportunities that constitute the basis of our strategy. We then use Common Stocks,
Exchange Traded Funds (ETFs), and Option Contracts to monetize the short-term patterns
that take form when these securities are freely traded.
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The realized gains (usually between 6% and 15%) from the frequent trading of these patterns are further enhanced by the
use of 2-to-1 margin, which essentially doubles the cash-on-cash returns. Then, as the returns from each completed
trade accumulate, they allow for larger and larger position sizes in subsequent trading positions (the ”compounding
effect”).
Going forward, this compounding of trading profits generates exponential results throughout a 12-month period, which
has consistently produced 40% to 60% annualized investment gains year-in and year-out.
SYSTEM METRICS: The Data that Leads to Large Returns
The Service SYSTEM takes in and analyses a tremendous amount of investment data from markets and sources around
the world. Below are sample lists of key metrics we extract from those large data flows which are screened, sorted and
scored by the SYSTEM.
SAMPLE INPUT DATA
Fundamental Inputs (stocks only):
Revenues / Sales
Quarterly / Annual Growth Rates
Earnings per Share
Return on Equity / Assets
Earnings / Sales Momentum
Operational Efficiency
Quality of Earnings
Research and Development
Cashflow / Operating Margins
Management / Industry Leadership
Valuation Inputs (stocks only):
Price to Sales
Benchmark Margins
Price to Earnings
Capitalization Float
Book Value
Discounted Cashflow
Enterprise Value
Sector / Peer Valuation
Debt to Equity
Value / Risk Models
Technical Inputs (all securities):
Support / Resistance Levels
Bollinger / Donchian / Volatility
Price Trend / Formation
Volume Analysis (Accum./ Distrib.)
Moving Averages / Overlays
Fibonacci Ratios / Projections
Oscillators / Momentum
Elliot Wave / Gann Quadrants
Wave Theory
Cycle Analysis
Other Data Input Samples:
Institutional Support
Specific News / Event
Short Interest
Market / Business Cycle
Relative Strength
Macroeconomic Trends
Insider Ownership / Trading
Fiscal Policy / Regulation
Market Leadership
Intermarket Analysis / Statistics
SECTOR ROTATION: Following the Footprints of Elephants
Wall Street Axiom – “There’s always a bull market somewhere.”
No matter how severe the broad market can get, there are always pockets within the market (maybe an industry, an entire
sector, or certain key commodities) that excel regardless of market conditions and continue to attract investment capital
flows.
Sector Rotation (large capital flows from one industry group, sector, or asset class to another) is a natural function of the
economic / business cycle and is central to our investment philosophy and strategy. It is often a predictor of major investment trends as large institutional investors reallocate their resources while adjusting to the prevailing market conditions.
The Service SYSTEM contains a proprietary module that we call the “MacroScope” which measures and tracks global
institutional money flows from:
National and International Banks
Discretionary Investment Funds
MACROSCOPE
Proprietary Trading Firms
Hedge Funds and Investment Banks
Insurance Companies
University Endowments
Private and Public Pension Funds
Large Family Offices, and…
Similar groups and entities that now represent over…
70% of the total Capitalization of the Market.
With multiple billions in cash at their disposal, these financial elephants often set the tone for most markets. Understanding and identifying their current investment interests will usually lead to high-probability trading opportunities – if you know
how to find and follow their footprints.
As a result of Sector Rotation, the massive trading dollars these institutional investors represent tend to accumulate within
certain industries and asset classes. This causes the individual businesses, commodities, and currencies from these
groups to thrive and their prices to significantly outperform while, as importantly, leaving other sectors to underperform.
Imagine if in 1998 and 1999 you were trading Internet and Technology stocks as they went higher and higher. Then, in the
early 2000’s you switched to Home Builders and Basic Materials industries as they soared. Next, in the mid 2000’s you
went long in key commodities like Crude Oil and Copper. And then switched directions by shorting Financials, Real Estate,
and the Euro in the late 2000’s. And reversing again at the turn of the decade to go long Industrial and Retail stocks. All of
which would have been prescient and highly profitable moves.
Analyzing and acting on Sector Rotation could have led you to make these very decisions. It has tremendous predictive
value when it comes to large and thematic shifts in investment trends. And you can improve your win-probability dramatically when short-term trading in the same direction of powerful macroeconomic forces like Sector Rotation, which have
ultimately driven long-term market trends. The Service SYSTEM, therefore, is geared to detect and focus on ...
this Market Moving and Fortune Making Phenomenon.
SHORT-TERM TRADING: Riding the Wave
SHORT-TERM TRADING: Riding the Wav
Trading fact: Neither Stocks, Commodities nor Currencies trade in straight lines – whether while going up or
while going down.
Rather, a security’s price movement develops in swings – higher and lower – with peaks and valleys that are generally
more wave-like. The undeniable reality is that market securities are sometimes trading up in price and other times trading
down in price, but at nearly ALL times these directional movements occur in the form of Wave Patterns.
By trading only the short-term waves, you largely avoid the problems found in intermediate and long-term investing where
if you’re wrong on the overall direction of the price trend, your trade is doomed to failure.
Therefore, pre-determining the long-term future price of any security or market is … A FOOL’S ERRAND.
And it is certainly not necessary when you are trading in shorter time frames because of the persistent Wave Patterns
made by a security’s price movement in the market.
Stock: XYZ
$30
Out
In
$20
In
Aug 1st
Stock: XYZ
Price
Aug 30th
$10
Up Wave (impulse wave)
“LONG”
Out
Aug 1st
Aug 30th
Down Wave (corrective wave)
“SHORT”
Although it is clear that the above Stock (symbol: XYZ) was in an overall uptrend during the month of August, the Wave
Pattern made by the shifting Stock price gave opportunities for positive trade performance either going up (Long) or going
down (Short).
But had you been in a conventional “Long-only” investment during the entire month or longer, you would have only potentially profited from the “Up” side of the trend and been trapped in every down slope of the wave. You also would have
been limited to just this one trade opportunity that would have tied up the cash allocated to it indefinitely.
The short-term trader, however, had several opportunities to go in and out of XYZ and could have stacked (compounded)
those gains into a considerably higher return over the same period of time. This example illustrates the 3 distinct advantages of the short-term trader:
1. You don’t have to be right about the long-term trend.
2. Your money is not locked up in singular positions for several months or years at a time.
2. You have many more opportunities to perform trades and compound gains.
Short-term trading means … TRADING the “IS.” Not conjuring up the … “WHAT’S GOING TO BE.”
Again, speculating on the price of a security months into the future is a low-probability proposition. However, if you
know someone who can consistently tell you where the shares of Boeing Corp. will be trading or what the price of Platinum
will be 6 or 12 months into the future, then tell him or her to call us. We have a job for that person. But until then, simple
logic should tell you that…
STATISCALLY QUALIFIED SHORT-TERM TRADES (the “IS”) ARE THE WAY TO GO.
WAVE TRADING
Long
Short
Long
In the above example, we deal with the “is” by trading the short-term swings in each wave. When it “is” trending higher,
we trade the “Long” side of the best waves. And if, and when, it “is” trending lower, we trade the “Short” side of those
waves.
It’s not any more complicated than that. Most of the sophisticated techniques we’ve developed are used to determine
when, and in which markets, to best apply these tactics.
What we don’t do is sit on a position for months on end to see if the predicted “what’s going to be” happens to come true
(spoiler alert … it seldom ever does).
Another incredibly important point here is that short-term traders actually REALIZE (sell for cash) their trading gains and
that money resides in their account. Conversely, the long-term trader only has paper “Profits” that could evaporate before
his very eyes once the market moves substantially against him.
Stock: XYZ
O - Open
C - Close
C
O
O
C
Stock: XYZ
Price
Always
Open
$30
$20
O
C
Sep 1st
Sep 30th
Short-term Trader
$10
Sep 1st
Sep 30th
Long-term Trader
After the uptrend in August from the previous charts, XYZ turned lower during the month of September (as shown above).
The short-term trader continued to trade in (OPEN) and out (CLOSE) of XYZ as the Wave Pattern presented opportunities
for profit.
The long-term trader, however, saw all of his gains from August erased during the September decline. That’s the problem
with long holding periods and paper “Profits”. You can’t see the future (you can only “hope”) and, therefore, your UNREALIZED gains are always at risk.
OUR PROGNOSIS: BUY and HOLD and HOPE is DEAD !
BASIC TACTICS: How the SYSTEM Wins
You should know, now, that trying to anticipate where a Stock or market will be months or years into the future is simply not
possible on a consistent basis and exposes your investment capital to unnecessary risks.
Consider some of the events since just the turn of the millennium that drove huge market reactions and would have been
needed to be foreseen:
The Tech / Internet Bubble
The 9-11 Attacks
The Invasion of Iraq
The Real Estate / Mortgage Meltdown
The Financial Crisis
The Euro Crisis
Global Government Bailouts
The Fed’s Quantitative Easings (QE1,2,3…)
The Bull Market Recovery
Because of all the uncertainties, long-term investing has become dangerous to your financial health. There are many
more safe and statistically significant methods to mitigate this uncertainty, in the short-term, by identifying highprobability price movements within the Wave Patterns created in nearly all freely traded markets.
Again, The Service SYSTEM seeks out these short-term moves to capture small, consistent gains averaging 6% to 15%.
We simply put an old investment maxim into practice:
“TAKE WHAT THE MARKET GIVES YOU.”
By realizing (cashing in) these gains in a 2-to-1 leveraged account (margin account) and then compounding them into
larger future position sizes, we exponentially increase the rate-of-growth of your Equity Balance over the course of 12
months, and beyond, as previously explained in our “General Strategy”.
That full 12-month period is very important to consider. The most significant impact from compounding actually occurs in
the latter part of any time period. This means that the accelerated growth that compounding creates is much more powerful in the last quarter of any 12-month period, as the position sizes really begin to swell from the build-up and compounding of profits during the previous 9 months.
So, remember this as you view and compare your results from month to month. As shown in the chart below, like the
aging of a fine wine, your returns do get better (and bigger) with time.
Compounding Effects on Equity Balance*
Equity Curve: Time = $$$
(Convexity)
S
1
|
2
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3
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4
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5
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6
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7
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8
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9
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10
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12
Months:
*Each month’s gains compound with the next, causing the Equity Balance in your brokerage account
to rise and create a convex equity curve of performance.
And here’s another thing for you to be aware of and even embrace: THERE WILL BE LOSING TRADES !
Yes, that’s right. We admit it. We’re not perfect, and neither is the market or any Wave Pattern. The fact of the matter is
that losing trades are an integral part of any market-based investment method. Just like bills and overhead are an integral
part of any conventional business.
In reality, successful trading systems must incorporate enough risk into their models in order to have the opportunity to
achieve the maximum rewards produced from their profitable investments. So, yes, be happy with a few losing positions
because without them there would be no winning trades!
The key to this, of course, is Risk Management.
RISK MANAGEMENT: Our #1 Priority
Responsible trading ultimately means – managing risk comes BEFORE seeking profits !
We manage risk by limiting the number and size of losing trades while maximizing the profits from the winners. If you have
more winners than losers, and the sizes of the winning trades are larger than that of losing trades, then by definition you
have a lasting and profitable trading system.
We limit the number of losers through statistical methods and we control their size by strict adherence to stop-loss criteria
that exits the trade before a large loss can develop.
We also diversify the trade portfolio by investing in markets with historically loose correlations (Stocks, Commodities, Currencies) and by the variety of securities we trade within them. In addition to that, we limit the size of any individual trade
within these markets to generally between 10% and 20% of your Equity Balance (on a cash basis).
And finally, risk is further minimized by maintaining a cash cushion in your account that typically fluctuates between 10%
and 50%, thereby limiting your total exposure to the market.
So, in summary…
Our 4-Level Risk Management Protections:
Level 1
– STATISTICS: Win / Loss Ratio
Level 2
– DIVERSIFICATION: Multiple Markets and Positions
Level 3
– FAIL LIMITS: Stop-Loss Triggers
Level 4
– EXPOSURE LIMITS: Cash Cushion
When it comes to risk management, much like the famous quote from Mr. Buffet on the top of “the System”web page, we
believe that “Return OF Investment” comes before “Return ON Investment.”
IN CONCLUSION: The Bottom Line
We’ve put together this Methodology page to give you, the Subscriber, insight into the processes and strategies that go
into The Service signals. However, just as you don’t need to know how a computer works in order to turn it on and off,
you don’t need to understand all the techniques and tactics of the SYSTEM to be able to OPEN and CLOSE trades.
But now, you HAVE learned much about the applied logic and methods that make The Service so unique and compelling. And, of course, there’s even more to it than described here – much of which has taken many years to fully develop.
You should be confident and secure knowing that this knowledge and expertise is behind every signal you get and every
trade you make.
As you place trades, you’ll know that you can always rely on our comprehensive methodology of Data Analysis, Sector
Rotation, Statistical Modeling, Wave Trading, and Risk Management, that is the basis of our SYSTEM. But it is enhanced
and strengthened even further through the use of the following advanced tools:
Proprietary Trade Algorithms
Qualitative Data Sets
Advanced Technical Analysis Techniques
Specialized Sentiment Indicators and Models
And Internal Neural Network Applications
… That give you an UNPARALLED TRADING EDGE and MARKET CRUSHING RESULTS!
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