The Model

nextSignals employs a multi-factor trading strategy that combines carry, momentum, and value. The model integrates:

    • evidence of asymmetric information and mis-pricing in options market pricing, along with daily analysis of component gamma exposure and high dollar-gamma at heavily traded strikes,
    • time series momentum as a function of volatility weighting,
    • detection of AI-enabled algorithms (low-latency and liquidity-consuming)*, 
    • valuations measured by structural relationships in the dual auction, and
    • scenario planning for tail events related to geopolitical and macroeconomic shocks.

nextSignals supervises two portfolios: 1) an intermediate-term investment strategy for growth and dividend income, and 2) an algorithmic futures trading strategy for short-term income and risk balancing.

*The nextSignals A01 study estimates the concurrence of  order book fade and momentum ignition to unmask AI-enabled trading.

Risk Mitigation

    • Rule #1: Think independently. Do not copy others’ trades.
    • Cultivate a risk mindset. Expect to be wrong and expect each trade to incur a significant loss.
    • Meticulously monitor performance. (All that truly matters is consistency.)
    • Stay focused. The auction market price discovery process presents only two trade opportunities:
      1. determined shifts in order flow that occur during well-delineated periods of balance, and
      2. rejection of extremes in sentiment when price deviates significantly from value.
    • Event risk happens; stay vigilant.
      • Post-event overreactions and reversals are associated with abnormal returns for many days. News drives momentum.
      • As event risk is amplified by large machine orders, consider closing vulnerable positions ahead of known market moving events (e.g. FOMC announcements, corporate earnings). Alternatively, a well chosen hedge should be considered.
    • Avoid counter-trend trading unless deliberately taking a short-term responsive trade at an auction bracket high/low. Intuition and historical references are poor predictors of future performance.
    • As quickly as possible, trade exclusively from profits, rather than savings capital.

Entry Timing

Wait for it.

But what’s “it?”  

Answer: a down-auction that encounters buying pressure (i.e. order flow).  

There are multiple ways to identify auction lows – e.g. “buying tails” in the market profile, levels in close proximity to the lower margin of the options market’s implied move, and/or down auctions that approach a long gamma put wall.

The simplest way to recognize buying pressure is merely to see transaction volume increase on down-bars, pushing the close up, off the low. But context matters. See below.

Exit Timing

P R I N C I P L E S

A decision not to take profit should represent the view that the current market remains undervalued.

    • Predetermine and respect the level you will cut a loss “mercilessly” and then move on.  (Use platform alerts as “mental stops” to avoid getting taken out by short-term volatility.)
    • Exit decisions should be based primarily upon one of two conditions:
      a) the position is richly valued and has more to lose than it has to gain, and
      b) the position has performed poorly from the outset. (Early adversity is a poor prognostic indicator, especially for long OTM options trades.)

Profits are not real until they are taken.

    • Perfect timing efforts can cost a lot; exit when nearing a profit target. 
    • Selling into strength during rally climaxes ensures the least slippage, tightest spreads – and thus, the best fills.

Finding Trade Ideas

    • The Thinkorswim® trading platform provides two excellent ways to identify trades:
      1. Scan > Option Hacker: Create search criteria, for example, to identify significant new volume.  It’s often possible to improve upon the timing of investors who place large orders in indexes and sectors.
      2. MarketWatch > Quotes: Create watchlists of highly liquid assets. Using Thinkscript®, you can create custom columns to identify which assets have the greatest potential for movement in the upcoming week.  Trade what’s moving.
    • Seekingalpha.com
    • FinTwit

Futures Trading

P R I N C I P L E S

    • The benefits of trading futures are well described by the CME here.
    • Focus on one market (e.g. /ES) and one chart (e.g. 10,000t).
    • To make money, one has to trade something that moves. /ES moves and is levered. While leverage is a two-edged sword, combining a high performance algorithm, order flow-based decision-support tools, and expert supervision of the AI can provide for consistent returns.

T R A D I N G   R U L E S

    1. Enter the trade if the algorithmic entry signal makes sense and price is bounded by high liquidity above and below.
    2. Establish a reasonable profit target based on key auction reference levels.
    3. While in the trade, oversee the algo’s signaling and follow the auction’s order flow, paying strict attention to the market’s response to the entry of large transaction volume.
    4. Mechanically trail profits with an alert, rather than a hard stop. If the alert is triggered, thoughtfully respond rather than emotionally reacting. (This is perhaps the hardest part.)
    5. Record every trade’s performance metrics along with any errors in judgment.

Consider:

The “20-10-40 Rule”: A Simple and Reasonable Trading Goal for Index Futures (Adjust the math to fit your risk appetite and account size.)

Trading S&P futures (/ES), a position size of 2 contracts that gains 2 points per day ($200) equals 10 points per week ($1,000) and nets 40 points ($4,000) per month.

Note: Only about 4% of traders are able to achieve this modicum of consistency.