ChaosMonitor is a unique service that provides consistent and accurate market timing information. It is also very different from the traditional investment research products,
so we would like to share our thoughts on how to make the best use of its power.
Do not follow your favourite instrument, follow its asset class
For active traders and discretionary fund managers who use their pattern-recognising abilities to detect trading opportunities it is quite common to focus on two-three instruments and ignore the rest. They are likely to be disappointed when ChaosMonitor will not show any signals on their favourite instrument for days or even weeks.
Unfortunately, the market is not always presenting us with critical point patterns. When they are present, the signals are likely to be very accurate. Fortunately, most of instruments within an asset class are strongly correlated. ChaosMonitor forecasts large directional moves, a signal on Russel 2000 index or even on some lesser known European stock index such as AEX will still be very valuable for someone who trades S&P500. The correlation between benchmark instruments within an asset class will be sufficient to alert the traders to the overall change in market behaviour that is very likely to affect their favourite individual instrument as well.
Look at different time-scales
When setting up the filter on ChaosMonitor signals page, it is prudent to always
have longer timescales enabled. When you are focusing on 30 min price time intervals in your trading, you may safely ignore 15 min signals, but a signal on a 1 hour timescale is likely to be very important, because it would place a limit on what you may expect from the market dynamics during the trading day.
Adapt the signals to your strategy
Absolute return investment/trading strategies broadly fall in two categories.
Mean-reverting strategies bet that observed relationships in the market will continue
to hold. This category includes various types of spread and pair trading, long-short equity strategies, 'carry trades', investment in credit instruments etc. These strategies work well in range-trading, stable markets and can be compared to a short option position. A spike in volatility is likely to have a very negative effect here.
For traders who excercise a mean-reverting strategy ChaosMonitor compression signals serve as alarm bells, because they imply that the market is likely to move strongly from its current trading range. Extension signals, on the other hand, may mark tops and bottoms of the trading range where a new position may be initiated (See example).
Directional strategies include momentum trading and trend-following, as well as
Global macro that bets on eventual correction of certain economic mis-balances. For these traders compression points are the opportunities to establish a position, and extension signals are the likely exit points.
so we would like to share our thoughts on how to make the best use of its power.
Do not follow your favourite instrument, follow its asset class
For active traders and discretionary fund managers who use their pattern-recognising abilities to detect trading opportunities it is quite common to focus on two-three instruments and ignore the rest. They are likely to be disappointed when ChaosMonitor will not show any signals on their favourite instrument for days or even weeks.
Unfortunately, the market is not always presenting us with critical point patterns. When they are present, the signals are likely to be very accurate. Fortunately, most of instruments within an asset class are strongly correlated. ChaosMonitor forecasts large directional moves, a signal on Russel 2000 index or even on some lesser known European stock index such as AEX will still be very valuable for someone who trades S&P500. The correlation between benchmark instruments within an asset class will be sufficient to alert the traders to the overall change in market behaviour that is very likely to affect their favourite individual instrument as well.
Look at different time-scales
When setting up the filter on ChaosMonitor signals page, it is prudent to always
have longer timescales enabled. When you are focusing on 30 min price time intervals in your trading, you may safely ignore 15 min signals, but a signal on a 1 hour timescale is likely to be very important, because it would place a limit on what you may expect from the market dynamics during the trading day.
Adapt the signals to your strategy
Absolute return investment/trading strategies broadly fall in two categories.
Mean-reverting strategies bet that observed relationships in the market will continue
to hold. This category includes various types of spread and pair trading, long-short equity strategies, 'carry trades', investment in credit instruments etc. These strategies work well in range-trading, stable markets and can be compared to a short option position. A spike in volatility is likely to have a very negative effect here.
For traders who excercise a mean-reverting strategy ChaosMonitor compression signals serve as alarm bells, because they imply that the market is likely to move strongly from its current trading range. Extension signals, on the other hand, may mark tops and bottoms of the trading range where a new position may be initiated (See example).
Directional strategies include momentum trading and trend-following, as well as
Global macro that bets on eventual correction of certain economic mis-balances. For these traders compression points are the opportunities to establish a position, and extension signals are the likely exit points.
= large price move next
or 
= this price move ends