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Sunday, February 4, 2007

Tips for TradeRadar Users

First, I would like to thank all of you who have downloaded the TradeRadar software. As you have probably discovered, it is quite different than many typical stock market indicators and takes some getting used to. I would like to offer some tips and tricks that I have accumulated from my experience using the software.

Keep up to date on the releases - I have added a number of features that make it easier to use and I recently fixed a bug in the Signal Strength calculation for SELL signals. Full installs and upgrades are available on the Download page.

Interpreting the indicators on the Buy-Sell Indicators screen - the Dashboard is intended to help evaluate how good the BUY or SELL signal is by using a red/yellow/green scheme to provide a quick determination at a glance. This is a ballpark estimation. You may not agree with the color indicated. For example, a Signal Strength of 55% may be good enough for you but TradeRadar characterizes that as yellow (caution). That's OK if you can confirm your decision by evaluating other data. I often look for economic or fundamental data to confirm what TradeRadar says. This may lead you to follow what TradeRadar suggests or ignore it. The Variance is a quantity calculated as part of the statistical evaluation within the TradeRadar software. I find that I don't really pay much attention to this number. Signal/Noise ratio tends to be the one indicator that is always pretty high. If it is not above 90%, trading must be very choppy, without much of a trend indication. Be very cautious in these cases. The Slope is a value that I generate in order to evaluate whether there is a trend at work. It is a simple linear regression (click here for an explanation of linear regression) of the data in the window. It is also intended to help determine if there is a trend present. Usually, the bigger the number, the stronger the trend and the more interesting the potential reversal will be.

Using the Start and End settings on the Buy-Sell Indicators screen - setting up the window to evaluate is extremely important. If the window contains too many large peaks and valleys, you will get BUY or SELL signals too far in the past and the current signal may not be apparent. The best approach when looking for a BUY signal is to set the Window Start at the top of the most recent peak and the Window End at the most current day's data point. If you are looking for a SELL signal, do the opposite: set the Window Start at the most recent low. To find the appropriate high or low point to use for the Window Start, I usually start out with two years worth of data and zero in on the area of interest. Don't forget the feature that allows you to click on the price line or signal line to set Start or End points. Hold down the mouse button where you want to set the Start or End and when the Point Select dialog box pops up, click on the appropriate button (this is in the new version of TradeRadar only).

Generating Signals - in the drop-down at the top of the Buy-Sell Indicators screen you can choose the type of signal you want to evaluate. The Raw Buy Signal will always identify the lowest point within the window and the Raw Sell signal will always identify the highest point. Warning: DO NOT use these to determine trades or signals. You MUST use the Smooth Buy or Smooth Sell signal to base your trades on. The filtering used by the smoothed signals takes into account what price action is occurring AFTER the absolute high or low. Every chart will have an absolute high or low point but not every chart will flash a BUY or SELL signal. The Normalized Prices setting shows you the transformed data that TradeRadar will use to generate its signal.

Using the Filter and Sensitivity controls on the Buy-Sell Indicators screen - as you may have noticed, the default settings are the midpoints of each control. The Filter affects the amount of filtering on the TradeRadar signal, not on the underlying data (closing prices). This why we sometimes see TradeRadar showing unexpectedly weak SELL signals after a stock plunges. Reducing the amount of filtering in these cases will get a more realistic signal. Because the TradeRadar software uses a transfer function (click here for an explanation of transfer functions) to generate its signals, we can alter the performance of the signal by moving our data back and forth through the area of the transfer function. The Sensitivity control does this for us. When setting the Sensitivity to a higher number, it has the effect of exaggerating the strength of the signal. These two controls can be used together adjust the performance of the signal software. Experimentation and back-testing may be necessary to obtain confidence in the settings you choose. I tend to use the default at all times as that allows me to do an apples-to-apples comparison when looking at different stocks or different time periods for the same stock.

Amount of data needed - when the amount of data to evaluate gets too small, the signal is not as useful. This can be problematic if a stock suddenly falls soon after buying it based on a TradeRadar BUY signal and you want to know whether TradeRadar is now flashing a SELL signal. Another issue related to amount of data is the Kurtosis indicator. It will tend to be wider when there are smaller amounts of data to process. Here is another example of how the Dashboard gives a quick evaluation but the user may need to do the final interpretation of the indicators. In any case, TradeRadar typically likes at least a few weeks worth of data to chew on.

Hope this helps. Good luck pinging the market!

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