Cashing in on XGO

Dr. Hans Hannula, PhD, RSA, CTA

XGO, A New Technology

As a researcher, I constantly think, ponder, and theorize about why markets move the way they do. Over the years, I have learned more and more about the mysterious forces that move markets, ourselves, and the universe. One of the problems I have pondered is "How predictable are markets?" Many say markets cannot be predicted at all. That is the random walk theory. Some have claimed that they could perfectly predict markets. That's the deterministic theory.

I have found that neither works. What does work is chaos theory. It says that markets can be partially predicted, but not always. Chaos theory says that markets operate in "domains" of behavior. Within those domains, their behavior can be predicted relatively well. But at the boundaries between domains, the behavior is not predictable. Imagine a ball balanced on the point where two bowls touch at their razor thin rims. This perfectly balanced ball is at the boundary point between two domains, the two bowls. A slight breath of air can tip the ball into either bowl. No one can predict which bowl. But once the ball falls into a bowl, its motion can be computed very accurately. Markets behave this way.

So another question I have pondered long and hard is "How can markets be predicted within a domain of behavior?" My approach has been to seek out the physical laws that move prices, similar to the laws of physics that move balls dropped in bowls. Through painstaking research I have found that there are forces that move prices, physical forces. The source and patterns of these forces were revealed in my Face Of God course. That was a major step forward. I could see the forces operating and the resulting behavior, but still I pondered.

I asked "What is the mathematical relationship between those forces and price action?" If I could find the answer to that question, I could predict future price action, at least within domains. I needed an new insight.

Such an insight came to me the morning of January 23rd, 1996. As I awoke, an idea came that said,

"It's energy absorbion. Compute the energy being absorbed from the universe, and it will tell you where prices are going, for prices are energy."

That insight became the XGO program, because for any market X, it computes where that market will GO. Incredibly, it computes this from only one piece of information - the date of first trade. Price energy is computed for any future date after that. No past prices are ever used. None are needed. Just one formula. Very simple.

At first it may seem incredible that this can be done. But it is really not. If one understands the equations of motion of a ballistic body, such as an arrow shot into the air, one can compute its flight path. One simply needs the formula, and the launch data, such as weight of the arrow, the initial angle, the velocity, and the acceleration. From there it is "plug in the numbers and turn the crank." XGO, in a similar manner, computes the "energy flight path" of a market launched into the universe.

The XGO formula captures the harmony of energy flow from the universe into a stock, a commodity, or a person. It translates the graphical beauty and power seen in The Face of God pattern into a number. That number represents the energy that moves price. It shows the direction of motion, the relative magnitude, and the dates of turns.

Mathematical Evaluation

Figure 1 is a chart of the Swiss Franc and its XGO forecast. The thin line is the XGO forecast. Notice how accurately it drew the price line in advance. Note the day to day detail. And the fine timing of highs and lows. Pretty impressive, huh? Almost perfect.

Not statistically perfect. Just good. There is a statistical measure of how well a forecast matches reality, called the correlation coefficient. A perfect forecast is 1.0. A total failure is 0. Most forecasts fall in between. Experience in evaluating intraday neural net forecasts used in real trading has led to the following interpretation of the correlation coefficient: below .3 - useless for trading .4 - helpful .5 - decent .6 - good .7 - great over .8 - excellent We have found that the correlation coefficient is a very harsh judge of forecasts. The 10 billion neuron neural net (brain) between a trader's ears picks up things from the forecast that are not reflected in the correlation coefficient. Traders using technical analysis and a .5 or better forecast consistently make money. One trader I've worked with uses intraday forecasts that average .45. He wins on every 2 out of 3 trades, and makes $1.83 for every $1.00 he loses. So even a decent forecast can give one an edge in the markets.

So how good is that Swiss Franc XGO forecast? It computes to .61, a solid GOOD. Not bad for something using no price data. Such is the power of a fundamental theoretical approach.

XGO is not a perfect model of prices. It only computes the energy input to a market. The market uses that input and its own internal properties to produce the price output. For example, there are points in time when a market is at a chaos balance point. The ball is on the rim between the bowls.

At those points, a sharp break may occur and prices move much further that XGO predicts. This is a "quantum shift", or "band gap jump." Such breaks may temporarily give XGO a bad correlation coefficient, but the trading value of the forecast continues. After the quantum shift, prices return to following the XGO curve if it is simply shifted up or down. Figure 2 shows this situation.

Everyone wants to know about the stock market. Where is it going? Figure 3 shows the S&P 500 XGO forecast for the first part of 1996. Notice how well it has forecast the turns, especially those spike lows. For years I have worked on annual forecast methods. XGO tops them all. From February to early July, that forecast is a .614, a solid GOOD.

Market Evaluation

So can XGO really help your trading? The way to answer this is to look at an example. Figure 4 shows Tbonds, and the XGO function for bonds. Notice that while the forecast is not perfect, that it is pretty good. There are areas where the forecast does not work well. So to protect oneself from those times of poor forecast, one has to use trading rules. We have found these rules effective.

1. Make all entries and exits with stop orders.

2. Trade in the direction of XGO

3. Protect positions with a stop that trails XGO

Tbonds have been included in our hotline and newsletter position trading portfolio for nearly 5 years. We felt bonds were a key component of a balanced portfolio. But the trading results were not pleasing. They weren't bad-just not great. For four years we would win some money, then give it back. As shown in Figure 5, our equity moved about Zero, plus or minus $4000. That portion of our portfolio was stuck in a trading range.

XGO changed that. Since applying XGO to this market, we've broken out of the trading range and established a nice trend. Be advised that past results do not guarantee future results, and that trading futures is risky.

We have found that the key to reducing that risk is a constant search for new technology. XGO is a part of that technology. It is making a difference in our results.

XGO Helps

So I have learned that markets can be predicted, at least within the limits of chaos theory. XGO has been a valuable addition to my trading toolbox. Used carefully, it can give one a trading edge. Over the several months since it came to me, I have learned that XGO is real. The equation is valid. It works. It is not perfect, but it is excellent. It is on the cutting edge. XGO is the state of the art.

XGO is one component in a growing set of market tools under development at MicroMedia. One can learn more by contacting the author or checking out his WEB site at http://www.cashinonchaos.com/hans. For your own XGO chart for one year, send $36 and your date of birth to MicroMedia, Box 33071, Northglenn CO 80241, or fax to 303 457 98713

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