- 2000: Volume 9, No. 4 Tooling for Mega Profits

We live in a time of extraordinary science and associated profit opportunity. The same technology used to decipher our human genome has been brought into software that is more commonly available for analyzing everything from credit worthiness to stock and commodity portfolios. Today, investors have enormous profit potentials associated with sophisticated trading tools. Here are some examples:

Background

The paradigm for investment analysis has dramatically changed in less than three decades. The advent of powerful personal computers has played a significant role in the move toward technical analysis and more complex fundamental evaluation. In the past, fundamentals were considered tried and true while technical approaches were viewed as hocus-pocus. A basic lack of computing power and historical perspective represented the primary reason for this attitude. Technical analysis was considered more of an art form since it involved chart interpretation—a highly subjective tact, at best.

By the early 1980s, computers were revealing that commodity and stock prices do exhibit patterns that can be recognized and used to enhance market timing and profitability. Simple back testing of various moving averages proved the efficacy of this method for "filtering" price trends. Among the pioneers in this area were Tim Slater with his world-renowned CompuTrac software package, and Lou Mendelsohn with his enormously popular ProfitTaker system. Both products ran smoothly on personal computers. Both made system construction easy, fast, and accurate. Add services like Commodity Information Services and Bridge Quotes to round out analysis with data acquisition.

In tandem, Omega developed Trade Station for accomplishing everything from chart analysis to system development and data base management. The flurry of complimentary software became a deluge within a decade. By the 1990s a solid base of powerful market tools was available.

Technical Analysis Takes Off, But Fundamentals Are Back!

Computers and technical analysis are likened to ducks and water. Tedious tasks of collecting, correlating, and presenting technical data are as easy as mouse clicks. Graphic presentations? No problem. Reports? How do you want 'em?

The two most broadly identified strategies remain "technical" or "fundamental." Within each are subcategories that exhibit some cross-pollination. On the technical side there is ever popular charting, statistical analysis, and neural network pattern recognition. Fundamentals include statistical analysis, and neural networks as well. Given these broad categories, some trading tools help with technicals, other with fundamentals, and several with both.

Although technical analysis may have eclipsed fundamentals in our new information age, consider that the greatest drawback to fundamentals has always been accurate data acquisition and analysis. Most obvious might be weather and its potential impact upon agriculture. Channels for obtaining instant weather information have exploded. From the internet to the weather channel, traders are almost all on an equal footing. That surprise freeze in Florida is no longer such a surprise.

Further, satellite and aerial photo imaging can assess the impact of weather events to avoid misinterpretation and overreaction. Spectography yields moisture content, protein, field density, wind or insect damage, and a host of other significant details. True, spectographic information is not as readily available as a vanilla weather forecast. Yet, this information is no longer the exclusive purview of the more powerful trading interests. In the not too distant future, planting intentions and associated crop reports will no longer be derived from surveys. Exact measurements of world crop conditions will be common for virtually all agricultural commodities.

One example of information dissemination and analysis was the effect of hurricane Floyd upon the 1999/2000 pig crop. Floods devastated hog operations in the Carolinas and other eastern states. Within a day after the rains subsided, aerial surveys indicated a price-influencing decline in deliverables for the 2000 expirations. With near crystal ball precision, traders were able to align with a squeeze in February 2000 pork bellies as well as the associated rally in lean hogs.

Exacting science is not limited to agricultural commodities. Today's traders are able to track oil tanker movements from the Middle East to global ports of call. These tankers provide insight into the amount of oil in transit. Delivery schedules hold keys to refining commitments and, in turn, distillate supplies. Using computer models, energy traders can plug factors like current supply and demand, weather, and economic conditions to extrapolate price trends.

Information is clearly king. Those who have it prosper, those who don't gamble. Since the formidable effort of gathering and analyzing fundamental information has, too, been reduced to a technical exercise, many investors are realizing that fundamentals are back... complimenting technical timing to produce a one-two winning combination. The use of technical and fundamental analysis is called hybrid analysis or "technofundamental" trading.

The Tools

There are four trading tool categories; 1) Services/systems, 2) Analytics, 3) System Development, 4) data acquisition/mining. A list of services with contact information can be found in Table 1.

Table 1

Trading Tool Directory
CRB COMMODEX NeuroShell BrainMaker ProfitTaker DTN FarmDayta FutureSource Trade Station	1-800-621-5271 1-800-336-1818 1-301-662-7950 1-800-284-8112 1-800-732-5407 1-800-485-4000 1-800-485-4000 1-800-621-2628 1-305-485-7000

Taken one at a time, services and systems represent a tried and true category that is as old as the markets. For example, the Commodity Research Bureau has been publishing the "Blue Sheet" since the 1950s. Now owned by Logical Systems, Inc., the CRB gives expert advice on trading specific markets. The CRB also distributes the Trend Analyzer technical system that uses proprietary price analysis to derive buy and sell signals. The COMMODEX® System has been continuously published since 1959 and uses price, volume, and open interest correlation to measure "accumulation" and "distribution." Like the Trend Analyzer, COMMODEX issues buy and sell signals along with stops. The distinction between services/systems and other tools is their proprietary nature. Users do not necessarily know how or why trading signals are activated. The service is used as a basis for each trading decision.

Proprietary services and systems are judged on performance, but there are few ways to verify track records. Other than paper trading a service, a potential customer is forced to rely upon a potentially self-serving, self-published performance record. Interestingly, time has a way of sorting out the good from the bad. Services that are "new kids on the block" are at a distinct disadvantage because they cannot boast the test of time. Historically, services don't last beyond three years if they don't deliver consistently profitable results.

As the name suggests, analytics are increasing popular programs used to analyze markets. In some cases, analytics are incorporated into data acquisition systems like quotation services. Analysis includes statistical methods like regression, correlation, extrapolation, probability modeling, simulation, and moving averages. Old timers will recognize that these statistical approaches transcend the PC era. It is the power of various analytic packages that boosts today's profit potentials.

One package that comes to mind is StatSoft®'s Statistica. At , this is probably the most comprehensive statistical analysis suite available for the PC. Add their neural network module, and you have a facility to master the most complex statistical investigation of any market. Built in data handling routines coupled with full Windows® integration permits large modeling. Now, seasonal aspects of volume and open interest can be understood with fractional effort. Pattern recognition algorithms unlock mysteries associated with counter or "contra" seasonal trends.

The latest Statistica module applies neural network technology to time series analysis. Previously, researchers were forced to augment Statistica with other neural network products. By incorporating this increasingly popular model building facility, Statistica has set a new standard for one-stop analytic shopping.

However, Statistica is a generic package—meaning that it is not investment or market specific. This general software can be used for any data analysis. It is not specifically designed for market data or price forecasting. Thus, users must build research from scratch. Although there are templates for proper constructs, Statistica assumes the user knows about statistical analysis and how it can be properly applied to specific data.

The popularity of neural networks spawned two "neural specific" packages; BrainMaker from California Scientific, Inc. and NeuroShell from Ward Systems Group, Inc. BrainMaker is a powerful neural network build facility with extremely handy data manipulation features. The program is easy to work and generates extremely usable results that include compact and versatile neural network modules. In addition, California Scientific gives market specific "starter" packages that help accelerate forecasting tool development.

In contrast, NeuroShell has a "beginners system" designed for novices and first-time users. This includes simplified procedures for data extraction, table formation, and neural network construction. Step-by-step wizards guide users through the process. Once mastered, the advanced system permits multi-layered neural network architecture. NeuroShell modules can run independently so several "training session" run simultaneously. NeuroShell incorporates a data preprocessor that creates initialization programs with a very easy language construct. Like BrainMaker, NeuroShell has stock and commodity market routines that make the jump into analysis friendlier.

If you want neural network technology without the research and back propagation, the developer of Profit-Taker has done the work for you. Lou Mendelsohn has market-specific neural networks that run on live data. These highly accurate modules have been pre-trained and programmed. All you add is data. Mendelsohn Enterprises has also done extensive work on inter-market relationships.

Analytics are available on most quotation services. Along with quotes and news, traders have the ability to create charts and technical studies. With dynamic data exchange live and static price action can be directly linked to a spreadsheet like Excel. Additional analytics can be applied by programming data cells.

For example, BridgeStation and FuturesSource systems have DDE back ends. This makes feeding proprietary systems easy and less error prone. Virtually any level of analytical sophistication may be achieved using these highly flexible systems. Unfortunately, the merging of stock and commodity applications has blurred the data line to an extent. Neither Bridge nor FuturesSource lists total contract volume as a datum item. Only specific contract volume and open interest are programmable. This forces parsing from news stories. It's an awkward step, but demand for total volume and total open interest could spur quote vendors to recreate these data elements.

Quote vendors fall within the last trading tool category of data acquisition. Market information systems distribute real-time and historical price data, news, and related information. Pricing for systems has precipitously fallen since the 1980s. From the internet to satellite—FM band to television cable—price and market data is at almost all investors' fingertips.

Simply put, market data is the foundation of all other trading tools. When selecting data vendors, price, flexibility, access medium, presentation, and consistency are vital criteria. There are amazing professional systems. But, ask yourself, "What do I really need to invest effectively?" Don't buy bells and whistles if you never intend to use them.

Most quote vendors are also a gateway to proprietary systems. For example, Data Transmission Network has gained popularity in rural areas based upon extremely competitive pricing and satellite access. With a modest disk, you can use a simplified computer/receiver for basic quotes, news, extensive weather, and impressive optional services. DTN units don't even require keyboards. A drop-down menu series swiftly guides users through all available features.

Interestingly, analytics and data acquisition blend into system development. BrainMaker and NeuroShell ultimately lead to trading systems. The analysis naturally points to a market approach. However, a program like Trade Station can work in reverse. Omega Research gives a framework and language for testing and building forecasting algorithms and decision rules. Then, the charting front end allows users to visualize results in the universal pictorial language of the high/low/close bar. Trade Station has become an industry standard for system testing and development. Omega has incorporated data import tools for the most popular vendor formats.

The Impact of the Web

The World Wide Web represents the ultimate forum for exchanging ideas, opinions, research, data, programs, and systems. This allows investors to literally start from scratch. The internet offers web sites for the novice, the experienced trader, and even the professional. Whatever you need is usually available on line at an affordable price.

When pondering the new tools for better trading ask a basic question, "What are the goals?" Tools are only as good as their application. A well-developed investment plan or strategy will point you in the right direction for the right tools. Not every trader has an interest in neural network development. Most want a reliable third party system or advisory that give the end result; buy, sell, or stay out.

As a final note, electronic trading justifies a mention. While designed to mimic person-to-person brokerage, e-trading can really streamline trading routines. Electronic order entry, processing, and reporting have become new tools for better trading. Coupled with instant and constant news, e-trading gives 24 X 7 access to executions. If the freeze hits the north Central U.S. grain belt at 6:00 p.m., the electronic market is ready, willing, and able to place your trade.

The traders tool chest has expanded each year with more powerful PCs, faster data lines, more comprehensive systems, development tools, and a host of other technological wizardry. Soon, a wave of an electronic wand or mouse will set a spell in motion that even Harry Potter would envy. Investing is hard work. Never go to work without your tools!

Philip Gotthelf publishes the COMMODEX® System and COMMODITY FUTURES FORECAST® Service. He is also President of EQUIDEX Incorporated (registered Commodity Trading Advisor) and EQUIDEX Brokerage Group, Inc. (registered Introducing Broker). Mr. Gotthelf can be contacted by email at phil@commodex.com. Toll-free number is 800-336-1818. Subscribers to CRB Trader can receive a free COMMODEX trial by calling the toll-free number or sending an email request.

Philip Gotthelf is known for extensive work in the futures industry and is the son of world renowned Edward B. Gotthelf, developer of the COMMODEX® trading methods. His writing has appeared in major industry publications including Futures magazine, Investing, Stocks & Commodities, Top Farmer, Pro Producer, Barron's, and Energy in the News. He is quoted regularly in Barron's, The Wall Street Journal, The New York Times, Fortune, Forbes, U.S. News & World Report, Money, and has acted as consultant to major financial and consumer publications. He is a regular guest on CNBC, MS-NBC, The Cable News Network, and appeared on The NBC Today Show and NBC Nightly News. He has also been featured on The Wall Street Journal Report, CBS, ABC, and FOX News.