overview:
The model is really quite simple; when the line on the chart of the model is going up, the model is extrapolating higher prices for $SPY. When the line on the chart is going down, the model is extrapolating lower prices for $SPY. In the upper right-hand corner of the model, you will notice a fluctuating value moving back and forth between -1.00 and 1.00, this is called a correlation coefficient. You can think of the correlation coefficient as the model’s way of evaluating its own level of confidence in making accurate predictions in real-time. The model has four levels of confidence, which are determined by the value of the correlation coefficient, 1.) high confidence, 2.) medium confidence, 3.) low confidence, and 4.) negligible confidence. Between the values of -.70 and .70 of the correlation coefficient, the color of the line in the chart will be grey, between the values of .70 and 1.00, the color of the of the line in the chart will be green, and between the values of -.70 and -1.00, the color of the line in the chart will be red.
Confidence levels:
| For higher prices (green line) | For lower prices (red line) | For undecided prices (grey line) |
| 0.70 to 0.79 = Low confidence | – 0.70 to – 0.79 = Low confidence | – 0.70 to .70 = Negligible confidence |
| 0.80 to 0.89 = Medium confidence | – 0.80 to – 0.89 = Medium confidence | |
| 0.90 to 1.00 = High confidence | – 0.90 to – 1.00 = High confidence |
Optimization:
The most effective way to utilize the model is by waiting for the pendulum of the correlation coefficient to swing from high confidence in one direction, to high confidence in the other direction, meaning a transition in values of the correlation coefficient from the -.90 to -1.00 range, to values in the .90 to 1.00 range, or vice-versa. Follow the fluctuations in the correlation coefficient to determine how accurately the model is extrapolating the future price trajectory of $SPY. During a strong trend upwards in price, the value of the correlation coefficient should remain within the .90 to 1.00 range for the majority of of the trend, during a strong trend downwards in price, the value of the correlation coefficient should remain within the -.90 to -1.00 range for the majority of the trend. When the model begins to recede into lower levels of confidence, as demonstrated by the correlation coefficient, this is indicative of a wavering in, or reversal of, the current price trend. The model is most effective when extrapolating price trends initiated by three consecutive green candles, and or, three consecutive red candles, on a 1m:1d timeframe of $SPY, in correspondence with the direction the model is extrapolating with confidence. At times, the model will extrapolate the future price trajectory of $SPY with confidence, while the price of $SPY is moving in the opposite direction. This is indicative the model is detecting these movements as countercyclical noise within the context of the model’s analysis of the current price trend, meaning, the model detects these movements as insignificant in its analysis.
VOLATILITY:
Volatility, in financial markets, refers to the level of indecision in the valuation of an asset. Volatility can be visualized as stormy versus calm conditions at sea. When conditions are calm, indecisiveness is low, random variability is attenuated, and price extrapolations of the model are more effective. When conditions are stormy, indecisiveness is high, random variability is amplified, and price extrapolations of the model are less effective. Indecisiveness in the model, meaning instability in the confidence level of the model, and or, the direction of its price extrapolations, is indicative of stormy conditions at sea, or high volatility in the market, and can attenuate the effectiveness of quantitative analysis.
RISK:
The value of the correlation coefficient is directly proportional to the risk basis of the model, meaning, the probability of the model’s accuracy is determined by the value of the correlation coefficient. When the correlation coefficient begins to recede into lower levels of confidence, the predictive accuracy of the model declines. Therefore, risk assessment of the model should be based on the risk assessment of the user in relation to the correlation coefficient of the model.
Recap:
Follow the correlation coefficient as it fluctuates back and forth between positive and negative values. Three consecutive bars of either higher, or lower prices, in correspondence with the price trajectory the model is predicting with confidence, is the model’s preferred indicator to mark the beginning of a new price trend up or down, respectively. Pay attention to the correlation coefficient to determine the model’s evaluation of its own level of confidence. When the model begins to recede into lower levels of confidence, this is indicative the model is detecting a wavering in, or reversal of, the current price trend in $SPY.