Detecting the Upside Using CTM

The Complete Trading Model (CTM) demonstrates that you make money if you buy on the upside and lose money if you buy on the downside. So before you buy, you must decide if prices on the upside or the downside.

CTM has two indicators that will help you determine if prices have changed to the upside

Each CTM trade is a winner (makes money) or is a loser (does not make money). For each sell date of the price series CTM:

3. Divides the cumulative number of winning trades by the cumulative number of all trades.

For example, suppose trade 1 is a loser. After one trade the cumulative number of winners is zero, the running total number of trades is one; and the cumulative percent winners is 0%. Suppose trade 2 was a winner. After two trades the running total number of winners is one, the running total number of trades is two, and the cumulative percent winners is 50%. Continuing on suppose after 20 trades the running total number of winners is five, the running total number of trades is 20 so the cumulative percent winners 25%. Each sell date has a cumulative percent winners value.

Why Use the Cumulative Percent Winners Indicator?

As you watch a price series unfold in real time, you see prices drop and then start to increase. You're not sure if the price increase signals a new upside or is just a temporary blip on the downside. Therefore, you need another measure to confirm if the rise in prices is for real and a new upside is forming. In short you need a second opinion. The cumulative percent winners serves as that second opinion.

The rational for the indicator is when prices move down, the cumulative percent winners moves down because fewer and fewer trades are winners. Eventually prices bottom and then turn up and more and more trades are winners. Therefore, the values of the cumulative percent winners make their lowest value and then begin to turn up thus confirming the up move in prices. The cumulative percent winners bottoms sometime after prices bottom.

3. Divides the cumulative sum of gains and loses by the cumulative number of all trades.

For example, suppose trade 1 lost 10%. After one trade the cumulative sum of returns is -10%, the total number of trades is one so the cumulative return is -10%. Suppose trade 2 was a 15% gain. After two trades the running sum of returns is 5%, the total number of trades is two, and the cumulative return is 2.5%. Continuing on suppose after 20 trades the running sum of the returns is -10% so the cumulative return is -0.5%.

The cumulative return indicator is used with the cumulative percent winners to confirm a change in direction of prices. As prices move down, the return for most trades turns negative so the cumulative percent return moves down. As prices begin to recovery, returns turn positive and the cumulative returns bottom and then turn positive.

The cumulative return indicator usually bottoms after the cumulative percent winners indicator. This lag is not troublesome because it builds in a wait-and-see time interval to establish the real upside move in prices. If you buy too soon, you could still be on the downside of prices.

To determine if prices have moved from the downside to the upside you examine simultaneously the cumulative percent winners, cumulative return and price. After all three turn positive, you may infer that prices have moved to the upside. In real time you would monitor the CTM indicators and price to determine if the up trend continues.

How long the three indicators must stay positive for you to conclude the upside is in place is not a fixed time interval. An aggressive investor might say prices changed to the upside the instance the two indicators and price moved up together. A more cautious investor would monitor the trend for weeks. Another investor could use a longer monitoring period. The time you wait to "place your bet" depends on your investing style. Obviously the longer you wait, the higher the likelihood you rule out a false start to the upside. But you'll pay more to get in if the upside is for real.

The following example illustrates how you look for a change in price from the downside to the upside. The example uses historical prices for the downside of one price cycle and the upside of the next price cycle for Kulicke & Soffa.

CTM computes the cumulative percent winners for each week of the price series beginning at the top of the first cycle. The cumulative percent winners and the cumulative returns are based on the KLIC cycle 1 downside and cycle 2 upside price series.

Note the left-hand side of the chart. At the beginning of the series the week-to-week values of the cumulative percent winners fluctuate widely because only a few data points are used in the computation. Therefore, one or two values can have a magnified effect on the total. This is simply a computational anomaly so ignore the first few weeks of the curve until the choppy pattern becomes smooth. After the wide fluctuations ended in the first few weeks, the cumulative percent winners dropped, rose, dropped steadily and then started a prolonged up move.

The next chart shows the cumulative returns, which are based on the same KLIC cycle 1 downside and cycle 2 upside price series. Like the cumulative percent winners, ignore the wide swings of cumulative returns at the beginning dates of the analysis.

The cumulative returns followed a steady decline until they bottomed and then showed a strong continuous up move.

The downside to upside indicators table summarizes the movement of price, cumulative percent winners and cumulative returns. The column labeled CPW contains the cumulative percent winners data and the column labeled CR contains the cumulative returns data. A red down arrow indicates a down move. A green up arrow indicates an up move. Remember, if you were watching the values in real time, you would not know when a bottom occurred.

On September 16 price and cumulative percent winners turned positive but cumulative returns were still negative. On October 7 cumulative returns turned positive. The two indicators and price remained in up trends after October 14 indicating prices were on the upside.

Comparing CTM to PDI Indicators

In addition to CTM you can use the Price Direction Indictor (PDI) to detect the change from the downside to the upside. PDI usually bottoms before the CTM indicators so it is a more aggressive indicator than the CTM indicators.

Conclusions and Recommendations

After cumulative percent winners, cumulative returns and price turn positive and remain positive, you may infer that prices have moved to the upside. The length of time you wait to conclude prices are on the upside depends on your investing style. Obviously the longer you wait, the higher the likelihood you rule out a false start to the upside. But you'll pay more to get in if the upside is for real. After you think prices are moving to the upside, you can decide when to buy.