CHANGE SCREEN
The basic premise behind the Methodology is that the opportunities to
generate outsized alpha (Alpha is the return in excess of
compensation for the risk.) abound when Change is occurring.
The highest alpha is generated
when a trade is entered just prior to the early
recognition of a change by the market
participants. Such an entry lowers the risk because
close stops can be entered and typically stops do not
hit.
Of course, money can be made by correctly predicting the
trend at any stage. However, risk adjusted returns get
progressively smaller as the change is recognized more and
more by market participants.
The two diagrams on this page illustrate five stages of long
trade based on change and five stages of short trade based
on change.
The change screen can be
equally well applied to macro-changes, industry
changes, technology changes, company changes, commodity supply/demand changes
and sentiment changes
For trading purposes the most
important change is the change in sentiment, and
correct prediction of change in sentiment leads to
outsized returns.
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GLOBAL FUND FLOW ANALYSIS SCREEN |
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The highest Alpha is mostly generated
when trades are in the direction of accurately predicted
fund flows for the time frame of the trade.
This is the big picture
analysis where the ZYX Change Method calls for analyzing and predicting fund
flows using the following global perspective:
Fund flows between asset classes
Fund flows between currencies
Fund flows between geographical regions
Fund flows between sectors and
subsectors
The trade candidates in line with the
big perspective fund flows are first confirmed based
on the fund flows in the individual candidate and then passed
on to the ZYX Change Analysis Screen.
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QUANTITATIVE
ANALYSIS SCREEN |
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Quantitative
analysis is the next screen for the candidates that pass
Theory ZYX Change Analysis.
Quantitative analysis is merely
data driven analysis to determine the price targets.
The Methodology compares the
anticipated fundamental data from the future state with
actual historical data from the same security as well as
other comparable securities.
For exit signal targets, the
analysis first builds models of overshoot and then mean
reversion.
The problem with
traditional quants is that too many of them do the same
trades at the same time.
The result is crowded trades
that are difficult to exit profitably.
The ZYX Change Method successfully
sidesteps this issue because the input of candidates to this
screen is not quantitatively derived like traditional
quantitative methods
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RESOURCES FOR THEORY ZYX
The
ZYX Change Method for investing and trading is
derived from widely acclaimed patented Theory
ZYX of Change. The following are some resources:
The Book on Theory ZYX at Amazon.com
The Book on Theory ZYX at Barnes and Noble
KnowledgeCM.com
Theory ZYX
White Paper
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ZYX CHANGE ANALYSIS
SCREEN
Imaging being able to fast forward to the future,
look back to the present, know what will happen in
the future, and then transport yourself to the
present.
If you could actually do what you just imagined,
without question, you would be the best trader on
the planet.
Well, there is a tool that comes close to the
future time machine.
The tool is the conventional Theory ZYX of
Change. Theory
ZYX of Change is a vigorous tool that successfully
predicts if a CHANGE will be or meet failure
In the ZYX Change Method, we use a
modified version of conventional Theory ZYX to
predict if change will be successful and to what
degree.
If the market expectations are of lesser success, we
have a buy trade.
On the other hand, if the market expectations
are of more success and Theory ZYX analysis predicts
a failure, we have a short trade.
Inductivity is one of the X
Axis elements of conventional Theory ZYX.
The modified version relies heavily on
inductivity of the market participants. Inductivity is
defined as the characteristic of market participants
to extend their thinking and actions on small steps
that are contiguous to the present state.
The vast majority of market
participants are highly inductive.
This results in them being slow to picture
the eventual result of the change.
Their slowness presents an opportunity that
ZYX Change Analysis captures to get ahead of the
crowd in both entries and exits.
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TRIGGER EVENT
SCREEN
The market’s early recognition of change typically
starts with some event that triggers early buying or
selling.
To maximize annualized return, the Methodology
focuses on predicting trigger events and entering
just prior to the trigger event.
Predicting trigger events is easier said than
done.
Therefore, the second preference is to be a fast
draw upon the occurrence of a trigger event.
The obvious question is why not forget about
the first four screens and just focus on the trigger
event?
Decades of experience have shown that such an ad hoc
approach does not work for two reasons. First, markets
are perverse, and it is difficult to determine the
direction on an ad hoc basis.
A security may go down on a positive event or
go up on a negative event.
Or worse, there may be a head fake, i.e. a
security may go up first and then go down and vice
versa – examples abound.
It is only
with the foundation of the first four screens
that an accurate determination of the future direction can
consistently be made.
Second, the key to building large positions quickly
before most market participants catch on is to have
the conviction a to execute fast,
which is typically not possible without the first four
screens.
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TECHNICAL ANALYSIS
SCREEN
After the trigger event, the
Methodology uses technical analysis to determine
entry zones and stop zones.
Further technical analysis is used to
supplement quantitative analysis to determine exit
zones.
The research and recent testing
at "The Arora Report" show that the traditional
technical analysis no longer reliably works as
described in the classical literature and as practiced
by most technicians.
The reason appears to be that the traditional
technical patterns, support/resistance, indicators,
and sentiment analysis are now well known, giving
advanced indications to the smarter players as to
what the market participants following traditional
technical analysis would do.
The smarter players take advantage of this
information, sometimes acting ahead of the
traditional technical signals in the direction of
the predicted signals and then exiting in the order
flow generated by the technical signal.
This is the reason that as the years go by,
more and more break outs fail and the success rate
of technical patterns diminish.
The ZYX Change Method takes
advantage of the above described battles between
traditional technical analysis players and smarter
players to achieve better entries and better exits.
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TRADE MANAGEMENT
Trade management is crucial to making money,
especially for the smaller time frame trades.
The following are the basic tenents of trade
management as called for by The ZYX Change Method.
Time Frame
The ZYX
Change Method is equally profitable for very short term and
very long term trades.
The research at "The Arora Report" shows that
risk adjusted returns are maximized by focusing on
short term trades during periods of high volatility
and longer term trades during periods of low
volatility.
Scaling In
Entries
The ZYX Change Method calls for scaling in entries.
Research at The Arora Report shows that
the optimum smallest increment for scaling is about 5%
of the full position size.
How quickly and in how many increments a
trade is scaled in is a function of conviction,
volatility, and time frame.
The
ZYX Change Method will typically look for
buying on spikes down as stops placed
based on traditional technical analyses by weak
longs are taken
out and selling on spikes up when stops placed based on traditional technical analysis
by weak shorts are taken out.
Scaling Out Exits
The ZYX
Change Method calls for scaling out of positions
similar to scaling in for entries.
Research at The Arora
Report has concluded
that a proper mixture of scaling
out at pre-determined prices and trailing stops
produces optimum returns over a long period. The
method also calls for never losing more than 20% of a
large unrealized gain
Zones
Based on technical analysis and quantitative
analysis, entry zones, target zones, and stop zones
are predetermined before entering a trade.
The key points are to scale in or out within the
zones and ahead of the crowd.
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Date
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Progress
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1981
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Developed technical analysis
software
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1982
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Back tested various technical
indicators
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1982
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Developed gray box for trading
using technical indicators
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1982
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Great results in actual trading
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1983
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Mixed performance of the gray
box
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1983
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Developed a hybrid trading
model combining fundamental analysis and technical
analysis
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1983
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Developed a gray box for
trading the new hybrid model
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1983
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Major losses for the gray box
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1984
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Refined the hybrid model and
the gray box
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1984-1986
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Great results in actual trading
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1987
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The model went heavily short
the US stocks in
early 1987
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1987
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Huge losses on short positions
as the market spiked up.
Inadequate risk controls.
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1987
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In early October 1987, the pain
of losses on short positions was excruciating.
Abandoned the model and covered all short
positions realizing huge losses.
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1987
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In early October 1987, went
from 100% short US stocks to 100% long.
US stocks without any quantifiable model,
perhaps to make up for the losses in short
positions.
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1987
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Again huge losses on October
19, 1987
as US market crashed.
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1987 |
The most formative year as I learned the value of
adequate risk controls, not acting on emotions, and
the importance of not being too early. |
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1988-1991
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Disillusioned with US stocks,
focused on building quantitative models for
derivatives
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1991
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Heavy use of Neural nets.
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1992 |
Addition of Genetic algorithms |
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1993 |
Addition of Statistical Algorithms |
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1994-1996 |
Addition of Inter Market Analysis |
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2000-2003
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Development of Theory ZYX of
Successful Change
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2003-2006 |
Received requests for the application of Theory ZYX
to trading and investing |
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2007
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Development of the ZYX Change Method
for Trading and Investing
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2007
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Back testing and validation of
the ZYX Change Method
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2007
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Development of the Multi-Asset
Global Allocation Model based on the ZYX Change Method
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2007
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Development of Equities Long
Short Allocation Model based on the ZYX Change Method
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2007
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Started writing a blog, "The Arora Report."
No verbosity in the blog, just the trade
signals and clear, crisp reasons for triggering the
trade.
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2009 |
Development of the Arora Very Short Term Composite
Indicator or AVSTCI |
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2009 |
Development of the Short Term S&P 500 Timing Model |
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2009 |
Development of S&P 500 Intermediate Term Timing
Model |
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2009 |
Abandonment of S&P 500 Intermediate Term Timing
Model |
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2009
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Reward of performance of trades
based on the ZYX Change Method, success of two allocation
models, and initial work for more automation with
the ultimate goal of developing a gray box for the ZYX
Change
Method.
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