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Understanding and Utilizing
ANNI’s Prediction System and Trade System Outputs
The purpose of this document is to allow users to better
understand how to use ANNI’s main system outputs. By understanding how they are
meant to be used, you can greatly increase the value of ANNI in your investment
strategies. Taking a few minutes to read through this will be well worth your
time and effort.
One of the first misconceptions about ANNI’s outputs is that they are meant
to be taken literally. This is incorrect...they are more or
less indicators for what a particular stock may do in the near future and should
be treated as such. ANNI’s AI has the ability to find repeatable
patterns in a stock very well but the key here is ‘repeatable patterns’. When
ANNI produces an output it is assuming that all current conditions will continue
to remain the same therefore the accuracy of the predictions would be fairly
high if this was the case. Unfortunately as we all know in the stock
market...nothing remains constant for long. Many factors can influence a stock
that will change its current conditions either by a little or by a lot. Those
users that are familiar with the efficient market theory realize that most of
these factors are taken into account almost immediately as they become known.
With ANNI training on historical data it cannot take into account current events
that are just beginning to unfold. It can however begin to take into account the
effect of these events once the change is recorded into the historical data
file. The greater the change, the longer it will take for ANNI to adjust since
sometimes huge events can take days to unfold (this can be seen when new data is
downloaded and an abrupt change in the confidence level occurs before new
training is performed - a red flag to use caution on ANNI’s predictions). The
smaller the change the less impact it has for ANNI’s predictions obviously.
What this all means is that before proceeding with any investment move based on
ANNI’s prediction systems, a user should verify what current conditions may
affect the security of interest (i.e. look at current and recent news both for
the security of interest as well as the industry and the market in general -
ANNI provides online shortcuts to perform this operation very easily including
pulling up current news on entire Portfolio Groups at a time in addition to the
Quick Analysis tool showing current news at the bottom of the reports...so
please take advantage of these features and use them wisely). If current
conditions match with ANNI’s outputs an investor can proceed knowing their risk
has been reduced as far as possible. If current conditions do not match with
ANNI’s outputs an investor should reconsider their actions or proceed with
caution.
In simple terms what if ANNI’s outputs show an Up move with a Buy signal yet the
company of interest recently reported that the last 3 years of earnings would
have to be restated because the company was improperly backdating stock
options given to its officers (something that recently has happened with several companies), would you
still follow ANNI’s recommendation and Buy into the company? Of course not!
Having something like this come out of a company cannot be predicted by ANNI
therefore its outputs will have no way of forewarning the investor (which in
this case the results of this type of news will be bad and a possible Short
rather then a Buy may be in order). ANNI will be able to take into account the
effects the news has on the stock price as it moves from current events to
historical data, but until then an investor still needs to take a few steps
before hand to protect themselves as best as possible.
The second misconception is how ANNI is producing its outputs. Both the
Prediction System and the Trade System utilize a population of solutions rather
then a single solution (this is the Genetic Algorithm part). With the Prediction
System the outputs are a weighted average of the best nets which allow it to
produce more robust outputs and to be more stable when changes begin to take
place (this is because one or more nets may already have identified the new
patterns that are emerging and thus are taken into consideration when the
weighted average is calculated). It is by no means perfect though which is why
it is meant to be an indicator of the possible direction of the security rather
then it being exactly what the security will do (i.e. check current news and
fundamentals for confirmation). The Trade System is a little different in
respects that it does not use a weighted average of the best trade signals but
rather one single ‘best’ solution to current conditions. This is because the
outputs of the Prediction System vs. the Trade System are significantly
different and a weighted average of the Trade System could/would end up
producing sub-optimal results rather then improved results (because some trade
signals are conflicting whereas the Prediction Systems nets generally produce
similar outputs to some degree). This means every time new data is introduced or
further training of the Prediction System is done a new Trade Signal may be
selected that the system feels is better suited for current conditions.
So what exactly does that mean and what affect does that have on the Trade
Systems Outputs? When dealing with a constantly changing market and a Trade
System whose hopes are to produce the best trades possible a conflict comes up.
As many traders who have attempted to produce their own trades systems can
attest to...optimizing a particular trade system for a particular security only
works for so long if at all (since it is generally optimized via back testing
which sometimes is no longer relevant to current conditions). The more the
trader tweaks the system to produce better and better results, the quicker that
trade system falls out when the security/market changes. Because ANNI’s Trade
System works with up to 250 unique solutions simultaneously we have a way to
beat this problem head on. This means the solutions can be optimized for various
particular conditions and interchanged as the security/market changes. This
provides a user with an optimal trade system that is fully dynamic to
handling/reacting as quickly as possible to a change in the security by simply
switching the trade signal to one that is better suited to current conditions.
This method has caused some confusion though when a user observes the Trade
Systems output suddenly change from a Hold to a Wait without ever showing a
Sell. What has occurred here is a change in the ‘best’ signal where the prior
signal was currently in a trade and the new signal is not. This is not a
catastrophic problem though and is actually the best way to deal with changing
conditions since what has occurred is the Trade System identifying a change that
required a different signal to deal with it. Before the change the other signal
was indeed the best one to be used...but now with the change the newly selected
signal is better. This is how the Trade System quickly reacts to changing
conditions. What this means is that a user needs to properly interpret the
signals when this occurs. It is actually fairly easy to do as long as you keep
these rules in mind when observing the Trade Systems outputs. Action signals
(i.e. Buy, Sell, Short and Cover) can be taken for face value and acted upon
accordingly. Hold and Wait signals depend on your current position. If you are
currently out of the security and a Hold is suddenly generated this means the
same as a cautious Buy (or Short if the Hold is on a Short position). The reason
why it is a cautious signal is because the Hold could be from an action that
took place over a week ago and that same opportunity has diminished (i.e. risk
has increased, reward has decreased). The same holds true for the Wait. If you
are currently in a position with the security and suddenly a Wait signal is
generated this means the same as a cautious Sell (or Cover if you are currently
in a Short position). The cautious part means check out what is occurring with
the security, see if any current news could be affecting the PPS (price per
share). Maybe place some alerts on the stock to help notify you if indeed
something does go sour assuming you cannot find anything at the moment to
confirm or deny the signal.
As you can see, a little bit of footwork and research along with ANNI’s outputs
can go a long way to improving your trading strategies. By properly matching up
ANNI’s outputs to current conditions you can get confirmation of the outputs and
react accordingly. Otherwise if you simply use ANNI’s outputs alone you can
quickly get yourself into a lot of trouble since ANNI is no crystal ball...it is
simply a very complex indicator of what possibly might happen.
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