Today I would like to talk about waves. The markets express themselves through waves. But first, let’s look at waves. When on the shore, look at waves. look at them for a long time and pattern will arise behind your eyes. When I first attempted to put a neural network at work, the real first time, after having prepared the database and applied the simplest conditions possible,  I was expecting a big awful inevitable crash in the code, or an anyway “impossible” error to underline that I was trying to make something not available. Whooo. It passed and produced a meaningful output. In a fraction of time, all the theories I’ve read about random walks went in the bin. Trash. Market activity is actually pattern-based, and patterns arise from the wavy nature. At that time, I was working using the SPX as the input of the network and it took me many years to understand that everything you want a neural network gives you,  it must be on the output side. Self-referential networks may work for a while, but they are going to crash.

Waves generate because many forces are applied to the market. On the water surface, it is the wind that generates waves. In the market, the summing of all the operative setups generate waves. Waves that have intensity (volume) and volatility (price delta). Return to the shore: you will note that waves into the sea have moments of intense activity and other moments of almost flat water. This happens because waves have the characteristic of summing them up, either building giant waves or reciprocally annihilating.

I saw these images by Dave Sandford  and, whether I suppose that heavy editing may have been applied, I’m sure you will be pleased to watch:

We learn a very important lesson from these pictures: the dynamic of summing and annihilating each other generates exceptional events, explosions, overcharging, unsustainable conditions that collapse in a fraction of time. If you now return to a long term chart of the SPX,

Semi-log SPX monthly chart

I’m sure you are looking at it with a different eye. You know that enlarging the chart up to a 1 minute realtime, you have the same fractal behaviour. Waves build them up in any time frame, in the continuous.

Now, I would like your to return to “patterns will arise behind your eyes” and consider that, with a long experience, you may easily detect patterns in events. Simpler or more complex, patterns represent a probable outcome of an event, they fuel our ability to “foreview”. Patterns are actually the concept behind our self-defense attitude, they represent the conditions of a series of different components and their contribution to reaching a certain result.

Patterns inside a neural network are subject to the correlation between the inputs, as set up in the code. The network cannot guess something that it is not in the realm of what it already knows. No intuition. Correlation, instead. Correlation is the equivalent of the summation/annihilation process in water waves. In a neural network-based environment, the recipe of the elements that shape it is absolutely fundamental.

Can you correlate three inputs? Can you correlate twelve? many dozens? We do not have even the charting possibility of over imposing many dozens of prices and detect the available patterns. Here comes useful the neural approach. Consider that when analyzing the SPX, r.Virgeel does not “see” the SPX, it has no input from the index. What does r.Virgeel sees, instead? It sees the fluctuations of a selection of markets and econometric data from more than 200 items. The brain of r.Virgeel works at full steam for daily time frame with a distinguished size of 24 millions of neurons, and each one is a correlation. We are in a territory where human brain is by far over and artificial intelligence is able to produce meaning from what we humans perceive as chaos.

‘Cycles rise naturally into a system into which energy is added or subtract’

The website offers access to the numbers crunched by the neural networks: targets, stops, etc. Even if signals are provided, I recommend you to consider r.Virgeel is NOT a trading system, but a set of weapons you may add to your arsenal.

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