The premise behind the ZYX Change Method is that the most profits are generated with the lowest risk by successfully predicting change before the crowd.  There are often, but not always, five stages of a change.  Please scroll down to see the five stages. 

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 change screen can be equally well applied to macro-changes, industry changes, technology changes, company changes, commodity supply/demand changes and sentiment changes.


Detecting changes that generate outsized returns for investors is a major focus of research at The Arora Report.

  • Long-term index investors — macro change
  • Long-term individual stock investors — change in future earnings power
  • Long-term speculative stock investors — technological change  
  • Change in sentiment
  • Change in news flow

The concept is simple — money flows move the markets and individual stocks.  As an example, picture a stock in which money flow triples from its average on no news; this indicates that smart money knows something that is not yet publicly known. Eventually the news breaks and the stock moves up.


For individual stocks, this screen looks for abnormally higher money inflows to buy stocks and abnormally higher money outflows to sell stocks.


The screen also looks for divergences.  For example, a stock is moving up strongly but money is consistently flowing out of the stock; this is a sell signal.


In addition to individual stocks, at The Arora Report, this screen applies to big picture analysis in the following ways:


  • Fund flows between asset classes
  • Fund flows between currencies
  • Fund flows between geographical regions
  • Fund flows between sectors and subsectors


Imagine 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  ZYX Change Analysis. This is a vigorous tool that successfully predicts if a CHANGE will meet objectives or meet failure. 


In the ZYX Change Method, we use this screen 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 the ZYX Change Screen predicts a failure, we have a short trade.



Inductivity is one of the  elements of this screen  The screen 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.

The quantitative screen of the ZYX Change Method has specialized variations for different types of positions. It is used only for medium-term, long-term, and very long-term positions.


For individual stocks, it includes the following:

  • Free cash flow trend over the last eight quarters
  • Comparison of the present cash flow with the estimates of future cash flow
  • Relative cash flow compared to the peers in the same industry
  • Revenue growth trend over the last eight quarters
  • Comparison of the present revenue growth with the future revenue growth
  • Relative revenue growth compared to the peers in the same industry
  • Valuation relative to its own history
  • Valuation relative to the peers in the same industry
  • Special factors

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.

The market’s early recognition of change typically starts with some event that triggers early buying or selling. To maximize annualized return, the ZYX Change Method 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. 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 to execute fast, which is typically not possible without the first four screens.


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.

The foregoing is the reason that as the years go by, more and more technical break outs fail and the success rate of traditional technical analysis diminishes.


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.


The Arora Report has developed innovative proprietary algorithms to side step problems with traditional technical analysis.

Innovative Trade Management Guidelines of the ZYX Change Method have been a significant contributor to The Arora Report’s unrivaled investment performance in bull and bear markets.


You can gain access to The Arora Report Trade Management Guidelines by taking a 30 day free trial to one or more of our services.  Learn the powerful techniques that billionaires and hedge funds use to become spectacularly successful in the market.  You can continue to use these powerful techniques to grow richer even if you cancel your subscription.

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