Methodology

If you are contemplating following our strategy, you should familiarize yourself with the contents of this page. This is necessary so that you can ensure you consider the appropriateness of our strategy in the light of your own objectives, financial situation or needs and risk tolerance before trading. First of all, our system and methodology are proprietary.

Our system tracks the Exchange Traded Funds (ETFs) DIA, SPY, and QQQ. The SPDR Dow Jones Industrial Average ETF is DIA, which tracks the Dow Jones Industrial Average. The most popular ETF in the U.S. (and world) is the SPDR S&P 500 ETF (Ticker: SPY), which tracks the S&P 500 Index. The PowerShares QQQ Trust ETF is QQQ, which tracks the Nasdaq Composite Index.

The system contains back-tested data starting in January 2005. We went live October 1, 2012.

Nature of our Signals

We provide our financial services solely by generating and publishing ‘market signals’. Specifically, we provide our clients (via our website) with 'Buy' and 'Sell' signals based on the information contained in the charts. A 'Buy' signal flags when it is beneficial to be 'In' the exchange traded fund (DIA, SPY or QQQ). A 'Sell' signal flags when it is prudent to be 'Out' of the exchange traded fund (DIA, SPY or QQQ).

Exchange traded funds (ETFs) are a simple and inexpensive way to gain a diversified stake in hundreds of companies that make up the index thereby minimizing specific risk exposure to any one company. Because they have very liquid markets they can be bought or sold instantly through any stockbroker either online or by phone. They also have very low annual management expense ratios. For these reasons they are the preferred class of investment vehicle for market timing.

Our Strategies

We publish market signals with a strategy that generates a little more than 30 signals per year.

Deriving our Signals

In general, share market analysis is either ‘fundamental’ or ‘technical’ in nature.

Fundamental analysis endeavours to predict the overall direction of the share market by focusing on the economic outlook, sentiment surveys, individual industry circumstances and political events. Those who monitor ‘fundamentals’ hope to predict the next change in market direction before that change is reflected in share prices.

Technical analysis focuses on analysis of daily share price action. There are essentially two forms of technical analysis however. One form is based on the belief that it is possible to ‘read’ chart formations to predict market direction. Those who use this predictive approach to technical analysis embrace pattern recognition systems based on Fibonacci waves, Dow Theory, Elliott waves, head and shoulder, neckline, double and triple top, wedge, triangle and other formations.

By contrast, MechanicalMarketTiming.com adopts a purely quantitative technical approach that tries neither to predict nor to forecast. Our approach is based on reacting to price action. As such, ours is a combination of 'trend following' and 'momentum' to identify tradable impulses. Trend followers use what we call ‘reactive technical analysis'. Instead of trying to predict the market’s direction, this approach is geared to react to the market’s movements as soon as possible after they occur.

Hence, we seek to respond to the market, not anticipate it. Our focus is therefore on identifying any trend/momentum reversal at a relatively early stage and to ride the new trend until the weight of evidence shows or proves that it has reversed.

“Technical analysis … is not concerned with the difficult and subjective tasks of forecasting trends in the economy… Technical analysis tries to identify turning points…” (Martin J Pring, Technical Analysis Explained, 4th edition, McGraw-Hill, p.8.)

“Trend-following indicators always have you buying and selling late and, in exchange for missing the early opportunities, they greatly reduce your risk by keeping you on the ‘right’ side of the market. …(By contrast) leading indicators aim to predict what prices will do next. They provide greater rewards, but at the expense of increased risk. Most investors are better at following trends than predicting them.” (Steven B Achelis, Technical Analysis from A to Z, 2nd edition, McGraw-Hill, pp.33-35.)

We hope to buy at the beginning of an uptrend at a low price, ride the trend, and sell when the trend ends at a high level. The first and most important challenge is to determine when a trend is beginning or ending. A trend is a directional movement of prices that remains in effect long enough to be identified and still be playable.

Trend-following, or lagging, indicators don’t flag upcoming changes in prices; they simply tell you what prices are actually doing (i.e., rising or falling) so that you can invest accordingly.

Some Caveats

Our approach is designed to identify entry and exit points when a trend is potentially changing character. By definition, we will never get in at the beginning of a trend or get out at the top, but we want to be a part of it as soon as the trend changes.

Market timers – like all trend followers – earn their profits by capturing the middle of a trend. We never identify the trough or the peak. It’s the middle range that matters.

Our Approach

Our mechanical system will produce small negative losses, sometimes back-to-back. The reason for this is because the system is trying to get on the right side of the market prior to a large move (either up or down). Once trending with the market (as shown in the chart below), the system will capture that return. If you follow each trade, members will do very well and overall better than the buy-and-hold strategy of investing!

Technically, the system will work on any traded stock. For example, in the chart shown below of the Silver ETF (SLV), using our methodology for this five month period produced a net return of +21.6%. There were a total of 5 gains (short and long positions) and 7 losses, with one unchanged trade. Therefore it is understood a trader will have many small losses, but the system will capture all major gains. This is the beauty of the system when you combine momentum and trend.

Because we don’t try to spot upturns until they happen, we enter the market some days after an up-trend starts, but as close as we can get as generated through our algorithms. As a result, we forgo a gain that flows automatically to buy-and-hold adherents.

Equally, because we don’t try to spot reversals until they happen, we exit the market some days after a market retreat starts. As a result, we take some of the loss that invariably hits buy-and-hold adherents.

Essentially, trend following is all about foregoing some gains in a market upswing in the hope of avoiding most of the losses that would otherwise occur during a market downturn. Occasionally, the market – rather than continuing the trend – reverses just after we enter or just after we exit. Such back and forth swings are called ‘whipsaws’. Where this occurs soon after an exit, we can find ourselves back in the market at a higher price than we exited.

Losing signals are part of any timing strategy. The key is avoiding large losses. Our system is designed to always capture the large moves of the market, which will generate a larger return than the sum of losses. Generally, the nature of our approach means that over time winning signals should more than compensate for any losing signals.