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The Neural Network 5-Day Forecast function is one of the most popular features at Tradetrek.com. Many users ask us HOW and WHY it works and how one should use it to achieve the best investment results. Here are the answers; we hope this helps you to better understand the Neural Network.

Content Highlights: 1. How does the Neural Network 5-Day Forecast model work? 2. How accurate is the forecast? 3. How do I trade stocks with the help of the 5-Day Forecast at Tradetrek? 4. What are some Neural Network Forecast Trading Strategies?

How does the Neural Network 5-Day Forecast model work?

The model mimics the human neural network system (the neurons in the brain) and it studies the past behavior of the stock—500 days of volume and open, high, low, and close prices—to make an educated guess of the most likely price movements over the next 5 days in the future. Such self-learning, pattern recognition methods have been successfully applied to various applications in other branches of sciences and engineering. Two examples are voice recognition and spectroscopy. The neural network model at Tradetrek—Pipelined Recurrent Neural Network—is a special neural network model that performs better than the human brain at recognizing "sequential signal patterns" such as stock prices, whereas the human brain is better at recognizing "parallel signal patterns"—the human eye can easily tell a picture of a tiger from a picture of a cat. Every day after market close, we feed the model with the past 500-days of history of all stocks in order to train it for approximately 6 hours. This training prepares the Neural Network for real-time forecasts during the next trading day.

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How accurate is the forecast?

Figure 1

A typical 5-day forecast is shown in Figure 1. The green line shows the prices of the stock in the past 3 months. The blue dot is the real-time price. The purple line shows the most probable price levels in the next 5 days. The two yellow lines show the lower and upper limits of the prices in the next 5 days, and we calculated the positions of the yellow lines so that there is an 80% probability that the stock prices will remain between the two yellow bands. Therefore, the accuracy of the forecast is measured by the width of the bands—the distance between the two yellow lines. The narrower the yellow bands, the higher the accuracy, and vice versa. Here are a few observations:

(1) Most stocks at most price levels are unpredictable; we'll see a near flat purple line with a pair of wide yellow lines, and the prediction does not help us in making buy or sell decisions. The chart in Figure 1 is such an example.

(2) Some stocks at certain price levels are more predictable; we'll see a directional purple line with narrow yellow bands. See Figure 2 and Figure 3.

(3) Don't laugh at Tradetrek when you see a prediction with very wide yellow bands. We are telling you the truth! Your stock indeed has that much uncertainty, and you may purchase option straddles to take advantage of the high volatility.

Figure 2

Figure 3

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How do I trade stocks with the help of the Neural Network 5-Day Forecast at Tradetrek?

First of all, the forecast should be used only as a reference; one should never blindly follow any forecasts. As Tradetrek's University states (and Figure 4 indicates) the forecast only tells you, "...according to the past behavior of the stock, and based on today's stock pattern, the most likely price movements over the next 5 days is indicated by the purple line. Based upon repeated tests for such a prediction strategy, 8 out of 10 times, the price in the next 5 days should remain between the two yellow lines." Note that such forecasts will be more reliable if the market does not make dramatic movements and/or if significant news, stories, rumors, or company announcements do not come out during the next 5 days.

Figure 4.

Mainly, there are three ways the Neural Network model at Tradetrek can help you trade stocks. They are as follows:

1.	Use the Neural Network 5-Day Forecast to validate (or invalidate) your other trading strategies or ideas. Experienced traders always examine a trade idea from all perspectives. For example, if you tend to buy stocks based on company fundamentals and hold for a long time, you may want to check the 5-Day Forecast to see if a) you should buy a stock now—in case the model predicts a rise over the next few days—or b) you should wait a few days—if the model predicts a fall in the next few days—to get in at a more favorable level. Another example of using the Neural Network 5-Day Forecast as a "second opinion" is, if you are a technical trader and you plan to buy a stock when you have identified a particular bullish stock pattern, before you buy the stock, you can look at the 5-Day Forecast of the stock at Tradetrek to see if our model agrees with your analyses. Good traders are usually cautious and they believe in Murphy's Law: If anything can go wrong, it will go wrong!
2.	Our 5-Day Forecast in relationship to the upper and lower bounds (yellow "confidence" lines) can help you perform a good risk/return analysis. In fact, consistent and successful trading always depends on sound risk management. One may never be sure about whether a stock will rise or fall tomorrow, but one can identify a stock that has a limited downside with a much larger upside potential. This is actually the ultimate secret of successful trading and investing. It's less important (and almost impossible) to predict whether a stock will soon move up or drop down, but it's very important to make sure your trade has a good profit/loss ratio. Figure 5 below exhibits this quite well.
Figure 5.
	The neural network model is good at recognizing and identifying a meaningful "support line" and profit target. In this example, the predicted range is rather wide, but the lower yellow line indicates that, if the price drops, it is unlikely to drop all the way, but will be supported at the lower yellow line. On the other hand, if the price goes up, the likely resistance will be met at the level of the horizontal white line. Thus, if one buys this stock now, his profit potential is roughly $6, and his downside is about $2. The profit/loss ratio is 3. In principle, one should only do trades with a profit/loss ratio greater than 2. The neural network model is good at "seeing" those fuzzy support and resistance lines, so that it is particularly helpful in making such potential profit/loss assessment.
3.	Trade stocks based mainly on the Neural Network 5-Day Forecast as outlined in the next section. The focus is on the various strategies one can combine to successfully benefit from the use of the 5-Day Forecast.

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What are some Neural Network Forecast Trading Strategies?

1. Find liquid stocks as candidates with clear forecast directions and narrow yellow bands. Such picks are listed in real-time in our Live Picks section.
2. Make sure there will be no major news or announcements for the stock in the next few days.
3. Check the long term potential of the stock to confirm that it does not conflict with your current short term trading strategy, i.e., if you intend to buy the stock, check with Tradetrek's 6-Month Target to see if the price in the future is higher than the present price.
4. Make sure large institutions are not trading against you by looking at Block Trades/Institution Watch—If you want to buy the stock, make sure there are more block buys than sells.
5. Check that the Money Flow analysis is not against your plan. If you plan to buy, you can review the Money Flow to verify that fresh capital is not flowing strongly out of the stock.
6. You may want to diversify your portfolio and significantly reduce your risk exposure to market risks by doing two trades at the same time based on Market Neutral Strategies known as Pairtrades: you can buy one short-term bullish stock using half of your capital and short sell another short-term bearish stock using the other half of you trading capital. Look for lessons on how to Pairtrade in future editions of Tradetrek's Web Classroom.
7. Read Tradetrek's Live Comment for more details regarding the strengths or weaknesses of your stocks, for instance, check that the stock's VAR (value-at-risk) is suitable to your risk appetite. If you own 100 shares of the stock, you are 95% sure that you will not lose more than VAR in one day.
8. Cut loss immediately if the trade turns against you and the price moves out of the yellow lines. Sometimes, the cut loss rules by the yellow lines may lead to a loss larger than a loss you would like to incur. In such cases, cut loss sooner according to your own rules.
9. If you start to make a significant profit following the strategy, make sure to enter a non-losing stop loss order to protect your capital. This Neural Network Forecast trading strategy is a "position trading" strategy. The optimal holding period is 1 to 5 days. You should promptly take profit if the trade achieves the profit goal according to the forecast.

So, now you have the insider information that Tradetrek's globally recognized analysts rely on while trading with the Neural Network 5-Day Forecast. We hope you will apply these concepts and reap great benefits from the knowledge you have gained with Tradetrek's Web Classroom.

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