Our Layered Scientific Trading Method
Use a scientifically tested trading method that has over 40 decades of research to back it up.
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A quick word of warning...
Each one of the four parts to this strategy has scientific evidence to back up its profitability over time. However, this doesn’t mean you can rip up the rule book and risk your life savings on it.
The majority of people who attempt this strategy fail. Why? Because they don’t stick to the rules.
The majority of people who attempt this strategy fail. Why? Because they don’t stick to the rules.
Distilling all the information
onto one webpage is impossible. That’s why I have recorded a 2-hour training session which you can view for free here.
onto one webpage is impossible. That’s why I have recorded a 2-hour training session which you can view for free here.
Being consistent is tough. For example, the researchers found one specific entry method produced 200%+ return per year. However, they consistently executed it over a period of four years. Not months, weeks, or days.
Most online traders will try out a system for 90 days on average. This won’t cut it. To get the same results as the data scientists who tested these methods, you need to trade with the same consistency.
Most online traders will try out a system for 90 days on average. This won’t cut it. To get the same results as the data scientists who tested these methods, you need to trade with the same consistency.
Having said that, congratulations are in order. You’ve stumbled across one of the most powerful trading strategies in the world.
Let’s dive in.
Your New Trading Strategy
The Rules
There are 3 scientifically backed up rules you MUST follow in order to make this work.
01
Rule 1
Use the daily, weekly, and monthly timeframes
Gutierrez and Kelley (2008) discovered that price tends to keep moving, for up to one year, after even a small reversal.
In a study by Friesen et al. (2009), they said: “First, return autocorrelations are negative over very short horizons, positive over intermediate horizons, and become negative again over long horizons.”
In a study by Friesen et al. (2009), they said: “First, return autocorrelations are negative over very short horizons, positive over intermediate horizons, and become negative again over long horizons.”
Therefore, using daily, weekly, and monthly timeframes gives you a much better chance.
list of scientific studies
1. Friesen, Geoffrey C.; Weller, Paul; and Dunham, Lee, "Price Trends and Patterns in Technical Analysis: A Theoretical and Empirical Examination" (2009). Finance Department Faculty Publications. 11
2. Gutierrez and Kelley, 2008 — R. Gutierrez Jr. and E. Kelley, The long-lasting momentum in weekly returns, Journal of Finance 63 (2008)
2. Gutierrez and Kelley, 2008 — R. Gutierrez Jr. and E. Kelley, The long-lasting momentum in weekly returns, Journal of Finance 63 (2008)
02
Rule 2
Hold on to trades for
1-100+ days
Day trading doesn’t work. Anyone who argues otherwise needs to show you some scientific proof.
I have never been a fan of shorter time frames. They simply don’t work. Getting in and out of trades with a small stop loss is a recipe for disaster.
Chague et al. (2019) proved this. They found that it is “virtually impossible” for day traders to make money in the long run.
Basically, they came to the same conclusions as studies published decades before. Like Barber et al. (2009).
I have never been a fan of shorter time frames. They simply don’t work. Getting in and out of trades with a small stop loss is a recipe for disaster.
Chague et al. (2019) proved this. They found that it is “virtually impossible” for day traders to make money in the long run.
Basically, they came to the same conclusions as studies published decades before. Like Barber et al. (2009).
list of scientific studies
1. Barber, B. M., Lee, Y., Liu, Y., & Odean, T. (2009). Just how much do individual investors lose by trading?
2. Chague, Fernando and De-Losso, Rodrigo and Giovannetti, Bruno, Day Trading for a Living? (November 21, 2019). Available at SSRN: https://ssrn.com/abstract=3423101
2. Chague, Fernando and De-Losso, Rodrigo and Giovannetti, Bruno, Day Trading for a Living? (November 21, 2019). Available at SSRN: https://ssrn.com/abstract=3423101
03
Rule 3
Only use price to determine decisions. Ignore the news
Although there is some evidence that news trading works. You need to have a team of analysts to interpret every article, report, and speech that comes out.
Gutierrez and Kelley (2008) also discovered the following phenomenon.
“Our findings extend to weekly price movements with and without public news. In addition, there is no relation between news uncertainty and the momentum in 1-week returns.”
In other words... when it comes to momentum (how much price moves) the uncertainty that news brings about doesn’t effect the price direction longer timeframes.
Therefore, there is no need to factor in the news. It is distracting and will stress you out, which is the downfall of most news traders. Again, studies dating back decades agree with this statement (Oberlechner et al, 2005).
Gutierrez and Kelley (2008) also discovered the following phenomenon.
“Our findings extend to weekly price movements with and without public news. In addition, there is no relation between news uncertainty and the momentum in 1-week returns.”
In other words... when it comes to momentum (how much price moves) the uncertainty that news brings about doesn’t effect the price direction longer timeframes.
Therefore, there is no need to factor in the news. It is distracting and will stress you out, which is the downfall of most news traders. Again, studies dating back decades agree with this statement (Oberlechner et al, 2005).
list of scientific studies
1. Gutierrez and Kelley, 2008 — R. Gutierrez Jr. and E. Kelley, The long-lasting momentum in weekly returns, Journal of Finance 63 (2008)
2. Oberlechner, Thomas & Nimgade, Ashok. (2005). Work Stress and Performance Among Financial Traders. Stress and Health. 21. 285 - 293. 10.1002/smi.1063.
2. Oberlechner, Thomas & Nimgade, Ashok. (2005). Work Stress and Performance Among Financial Traders. Stress and Health. 21. 285 - 293. 10.1002/smi.1063.
Conclusion
These 3 rules will add an additional edge to your trading. All three have scientific backing. I only cited a VERY small sample of research. Each of those papers show at between 10-50 other studies backing up their claims. That’s over 150 scientific studies.
These 3 rules will also reduce the stress of sitting in front of your screen all day and spending hours looking out for news reports. That alone makes them worth adopting.
These 3 rules will also reduce the stress of sitting in front of your screen all day and spending hours looking out for news reports. That alone makes them worth adopting.
The Method
This trading method is a layered approach. Do not execute any of the steps in a vacuum. They have to be executed together.
01
Rule 1
Assess the phase or trend
of the market within the scientific timeframes
Using a scientifically verified governing pattern, it is possible to determine the direction the market is going to go in the next 12 months. This will determine which of the five phases the market is in right now.
This step feeds into rule №1. There are 5 possible phases in the market.
Up, Down, Sideways, Reversing-up, and Reversing-down.
In order to assess the phase or the condition of the market, we need to establish which direction the market is going now. Gutierrez and Kelley, 2008 demonstrated that the market can continue is an uptrend for up to 1 year after a reversal.
This step feeds into rule №1. There are 5 possible phases in the market.
Up, Down, Sideways, Reversing-up, and Reversing-down.
In order to assess the phase or the condition of the market, we need to establish which direction the market is going now. Gutierrez and Kelley, 2008 demonstrated that the market can continue is an uptrend for up to 1 year after a reversal.
list of scientific studies
1. Gutierrez and Kelley, 2008 — R. Gutierrez Jr. and E. Kelley, The long-lasting momentum in weekly returns, Journal of Finance 63 (2008)
02
Rule 2
Assess the patterns within the phase, or within the governing pattern
Once you’ve identified the phase of the market, you need to locate a historical precedent – also known as a pattern – within the phase. You can even combine a number of patterns on one chart.
If a market is in phase 4 or phase 5, then a reversal must have happened. This reversal becomes the governing pattern. If the reversal is heading up, then you are more likely to make a profitable trade if you take it in the direction of the phase (Friesen et al. 2009).
The patterns that happen within that phase will confirm the direction of the market, and when price is ready to break out, you’ll have momentum on your side. Foltice & Langer (2015) studied how momentum effected returns. According to them: “We find that the strategy can indeed work for individual investors with initial investment amounts of $5,000.”
When it comes to the patterns themselves, there are lots of studies that show proof they work. A small list of scientific studies has been provided below.
If a market is in phase 4 or phase 5, then a reversal must have happened. This reversal becomes the governing pattern. If the reversal is heading up, then you are more likely to make a profitable trade if you take it in the direction of the phase (Friesen et al. 2009).
The patterns that happen within that phase will confirm the direction of the market, and when price is ready to break out, you’ll have momentum on your side. Foltice & Langer (2015) studied how momentum effected returns. According to them: “We find that the strategy can indeed work for individual investors with initial investment amounts of $5,000.”
When it comes to the patterns themselves, there are lots of studies that show proof they work. A small list of scientific studies has been provided below.
list of scientific studies
1. Foltice, B. & Langer, T. (2015) Profitable momentum trading strategies for individual investors. Financial Markets and Portfolio Management, 29(2), 85-113.
2. Friesen, Geoffrey C.; Weller, Paul; and Dunham, Lee, "Price Trends and Patterns in Technical Analysis: A Theoretical and Empirical Examination" (2009). Finance Department Faculty Publications. 11
3. Gutierrez and Kelley, 2008 — R. Gutierrez Jr. and E. Kelley, The long-lasting momentum in weekly returns, Journal of Finance 63 (2008)
4. Leuthold, R.M. (1972) Random walk and price trends: the live cattle futures market. Journal of Finance 27: 879–889.
5. Stevenson, R.A. and Bear, R.M. (1970) Commodity futures: trends or random walks? Journal of Finance 25: 65–81.
6. Cornell, W.B. and Dietrich, J.K. (1978) The efficiency of the market for foreign exchange under floating exchange rates. Review of Economics and Statistics 60: 111–120.
2. Friesen, Geoffrey C.; Weller, Paul; and Dunham, Lee, "Price Trends and Patterns in Technical Analysis: A Theoretical and Empirical Examination" (2009). Finance Department Faculty Publications. 11
3. Gutierrez and Kelley, 2008 — R. Gutierrez Jr. and E. Kelley, The long-lasting momentum in weekly returns, Journal of Finance 63 (2008)
4. Leuthold, R.M. (1972) Random walk and price trends: the live cattle futures market. Journal of Finance 27: 879–889.
5. Stevenson, R.A. and Bear, R.M. (1970) Commodity futures: trends or random walks? Journal of Finance 25: 65–81.
6. Cornell, W.B. and Dietrich, J.K. (1978) The efficiency of the market for foreign exchange under floating exchange rates. Review of Economics and Statistics 60: 111–120.
03
Rule 3
Assess the potential for momentum with an insurance bar (daily or weekly)
Once you have the governing pattern, and the intermediate pattern, you need to look for an insurance bar. This will tell you exactly where to enter the trade. It will assess whether or not the momentum is ready to explode based on the close of the bar, relative to the high and low. A study by Dunis et al. (2011) found that open and close chart prices “generate a significant α and their returns cannot be solely explained by the factors derived from Fama and French (1993)”.
In other words. By using the open, high, low, and close of the bar to determine your entry, you can generate significantly higher profits using technical analysis “which cannot be explained by market factors.”
One year later, Ślepaczuk et al. (2012) released a study showing how Forex and Futures markets are especially well suited to this type of trading. Specifically... inside bars and reversal bars have been defined and tested by Caginalp & Laurent (1998). They found that: “The results were significant for both the buy and the sell signals, with the buy signal resulting in a tripling of the initial investment during a one-year period (with costs taken into account).”
Their study was later backed up by Shui & Lu (2011). In fact, since the 1998 study, there have been over 130 other research papers either relying on or confirming the results from Caginalp & Laurent.
In other words. By using the open, high, low, and close of the bar to determine your entry, you can generate significantly higher profits using technical analysis “which cannot be explained by market factors.”
One year later, Ślepaczuk et al. (2012) released a study showing how Forex and Futures markets are especially well suited to this type of trading. Specifically... inside bars and reversal bars have been defined and tested by Caginalp & Laurent (1998). They found that: “The results were significant for both the buy and the sell signals, with the buy signal resulting in a tripling of the initial investment during a one-year period (with costs taken into account).”
Their study was later backed up by Shui & Lu (2011). In fact, since the 1998 study, there have been over 130 other research papers either relying on or confirming the results from Caginalp & Laurent.
list of scientific studies
1. Caginalp, G. ; Laurent, H. Mathematics Department, University of Pittsburgh, Pittsburgh, PA 15260, USA. Applied mathematical finance. Vol. 5.1998, 3/4, p. 181-205. 1998
2. Shiu, Y. and Lu, T., 2011. Pinpoint and synergistic trading strategies of candlesticks. International Journal of Economics and Finance, 3(1), pp.234-244.
3. Dunis, C., Laws, J. & Rudy, J. J (2011) Profitable mean reversion after large price drops: A story of day and night in the S&P 500, 400 MidCap and 600 SmallCap Indices. Journal of Asset Management, August 2011, Volume 12, Issue 3, pp 185–202
4. Robert Ślepaczuk, Grzegorz Zakrzewski, Paweł Sakowski (2012), Investment strategies beating the market. What can we squeeze from the market? University of Warsaw – Faculty of Economic Sciences, No. 4/2012 (70)
2. Shiu, Y. and Lu, T., 2011. Pinpoint and synergistic trading strategies of candlesticks. International Journal of Economics and Finance, 3(1), pp.234-244.
3. Dunis, C., Laws, J. & Rudy, J. J (2011) Profitable mean reversion after large price drops: A story of day and night in the S&P 500, 400 MidCap and 600 SmallCap Indices. Journal of Asset Management, August 2011, Volume 12, Issue 3, pp 185–202
4. Robert Ślepaczuk, Grzegorz Zakrzewski, Paweł Sakowski (2012), Investment strategies beating the market. What can we squeeze from the market? University of Warsaw – Faculty of Economic Sciences, No. 4/2012 (70)
04
Rule 3
Let the market confirm that momentum with a resting order
Now that you have the patterns and the insurance bar, you will place a resting order (also known as a pending order).
The best way to confirm that your decision is correct, is to let the market confirm it. Besides making intuitive sense, there is an incredible amount of scientific evidence to back this up.
Grundy (2001) and Hirshleifer (1998) all document how profit increases when market momentum is automatically confirmed with a limit order.
The latter study has been confirmed and cited hundreds of times. For example, Shantha et al. (2019), Brasiano et al (2017), and Alti et al. (2019).
The best way to confirm that your decision is correct, is to let the market confirm it. Besides making intuitive sense, there is an incredible amount of scientific evidence to back this up.
Grundy (2001) and Hirshleifer (1998) all document how profit increases when market momentum is automatically confirmed with a limit order.
The latter study has been confirmed and cited hundreds of times. For example, Shantha et al. (2019), Brasiano et al (2017), and Alti et al. (2019).
list of scientific studies
1. ALTI, AYDOĞAN & TITMAN, SHERIDAN. (2019). A Dynamic Model of Characteristic‐Based Return Predictability. The Journal of Finance. 10.1111/jofi.12839.
2. Brasiano, Redik & Hanafi, Mamduh. (2017). Does Momentum a Domestic Phenomenon? A Case from Indonesian Capital Market.
3. Grundy Bruce D. (2001) Understanding the nature and risks and the sources of rewards to momentum investing. Review of Financial Studies 14(1):29-78 · March 2001.
4. Hirshleifer, David & Daniel, Kent & Subrahmanyam, Avanidhar. (1998). Investor Psychology and Security Market Under- and Over-Reactions. Journal of Finance. 53. 1839-1885. 10.1111/0022-1082.00077.
5. Shantha & Ram, Vedantam. (2019). Influence of news on rational decision making by financial market investors. Investment Management and Financial Innovations. 16. 142-156. 10.21511/imfi.16(3).2019.14.
2. Brasiano, Redik & Hanafi, Mamduh. (2017). Does Momentum a Domestic Phenomenon? A Case from Indonesian Capital Market.
3. Grundy Bruce D. (2001) Understanding the nature and risks and the sources of rewards to momentum investing. Review of Financial Studies 14(1):29-78 · March 2001.
4. Hirshleifer, David & Daniel, Kent & Subrahmanyam, Avanidhar. (1998). Investor Psychology and Security Market Under- and Over-Reactions. Journal of Finance. 53. 1839-1885. 10.1111/0022-1082.00077.
5. Shantha & Ram, Vedantam. (2019). Influence of news on rational decision making by financial market investors. Investment Management and Financial Innovations. 16. 142-156. 10.21511/imfi.16(3).2019.14.
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