The S&P 500 has entered a new never seen before territory, passing 2900 level on Monday, and you may wonder how it is possible that r.Virgeel may forecast something that it has never seen before. You have to know that neural networks, if applied to a well designed model, have the ability to generalize, a typical human behaviour. To generalize means to derive or induce a general conception or principle from particulars: in r.Virgeel's case, it means that it has enough experience (past data and training) to digest never seen before values and produce a reliable analysis. Aside the confirmation that the model that forms the foundation of r.Virgeel is well shaped, another interesting observation regards the fact that this is a further demostration that the market has an inner hidden structure and any random walk model is rubbish. The fact that humans are not able to see this structure is not relevant, when you have such a tool as artificial intelligence brute force.

Today I would like to talk about waves. The markets express themselves through waves. But first, let's look at waves. When on the shore, look at waves. When I first attempted to put a neural network at work, the real first time, after having prepared the database and applied the simplest conditions possible, I was expecting a big awful inevitable crash in the code, or an anyway "impossible" error to underline that I was trying to make something not available. It passed and produced a meaningful output.

Following my previous post "New Tools at the Horizon", one question was twirling in my mind: why the stock market is forecastable, but the forecasts are not affordable? The forecastability of the market is an evidence, because if it were not – being it just a random walk – there would not be the possibility to have an output from the neural networks that manage the forecast process. For a neural network to work, there must be some sort of structure inside tha data that can be used to produce the forecast/diagnosis. And this hidden structure is present indeed inside the market data, otherwise r.Virgeel would be totally blind and dumb. This is a sample chart of a blind network: not structure is evaluated and the output is just an array of zero values.

You always make the same simple moves (start, end, turn right, turn left) and the same tracks, but never in the same way. Imagine that the neural network knows the track. It does not guarantee that you arrive downhill integer, but it can avoid a lot of errors. It has already descended that track and even some variants and similar. I should call the model r.Virgeel.

I've always been reticent to publish the performance of the Position trading system: I've even dismissed the record table for the subscribers, without any complaint from them. It should be complex to explain why, it's something intuitive, but it is related to my distrust in backtesting. First, I've always tested forward, not behind. The model, or as I call it now: r.Virgeel has taken shape during four years and is performing well. It is still under development: new ideas are passing as clouds at the moment.

Following my previous post "New Tools at the Horizon", one question was twirling in my mind: why the stock market is forecastable, but the forecasts are not affordable? The forecastability of the market is an evidence, because if it were not – being it just a random walk – there would not be the possibility to have an output from the neural networks that manage the forecast process. For a neural network to work, there must be some sort of structure inside tha data that can be used to produce the forecast/diagnosis. And this hidden structure is present indeed inside the market data, otherwise r.Virgeel would be totally blind and dumb. This is a sample chart of a blind network: not structure is evaluated and the output is just an array of zero values.

I'm fully aware of the basic fact that every trader and investor has it's own style. Many school of thinking, but everyone is really different, particularly in the private sector. If a private trader survives the first 18 months without being wiped out, then she/he may have the possibility to play on. It's a sad and real statistics: 95% of traders are wiped out in the first 12-18 months of activity. So, if you are a private trader since years, you are in the 5% and you have built your skills with iron and steel, it's not easy to approach a new language.